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Credit Risk Policy Analysis of United Leasing Company Limited Introduction This assignment based upon “Credit Risk Policy Analysis of United Leasing Company Limited". Objectives of the report Specific objectives of the study include the following: •

To analyze the Credit Risk Management policies of ULC.

To compare the policies with the guideline given by the central bank and check their compliance with the guidelines.

To analyze the process through ULC evaluates the credit for corporate clients and even SMEs.

Scope of the report The study will focus on the Credit Evaluation process of ULC and its compliance with the guidelines of Bangladesh Bank. The other financial functions of the company will not be considered in the study. Methodology: The information for the Guidelines part of the report was collected from secondary sources like books, publications, WebPages, and Guidelines (Bangladesh Bank, 2005) and other central banks of different nations. The information for the project “Credit Risk Policy Analysis of United Leasing Company Limited" have been collected from primary and secondary sources. Information collected to furnish this report is both from primary and secondary in nature. The primary sources are:


Practical Deskwork.

Face to face conversation with different officials.

Analyzing various implementations of the policies.

The secondary sources are: •

Different Manuals published.

Guidelines of CRM Policy of ULC

Guidelines of Bangladesh Bank.

Publications obtained from different libraries and from internet.

Library research.

Guidelines of other central banks of different nations.

Limitation: The major limitations faced during the preparation of this report are as follows •

Such a short internship period is not sufficient to collect and understand the insights of an extensive process of Credit Risk Management.

Some policy does not permit to disclose various data and information related to their management policy.

An Introduction to ULC 1.1 Background Leasing Company Limited is a NON-Bank Financial Institution engaged mainly in lease finance business and bills discounting. It was incorporated on 27 April 1989 as a public limited company under the

COMPANIES ACT

1994 with an authorized capital of BDT 1,000

million. From the beginning, ULC managed to grow rapidly with an average operational growth of above 30%. In April, 1994 the company issued 10.71% of its shares for public subscription at 50% premium and was oversubscribed. Now it is listed on the Dhaka Stock Exchange (DSE) and from the date of listing, its shares are enjoying high price. Foreign


sponsors of the company are Asian Development Bank (ADB), Commonwealth Development Corporation and Lawrie Group Plc of the UK. Sponsors in Bangladesh are Duncan Brothers (Bangladesh) Ltd, Shaw Wallace Bangladesh Ltd, National Brokers Limited, Octavius Steel & Co. of Bangladesh Limited and the United Insurance Company Limited. 1. 1.1 Company Milestones    

Incorporation of the Company Commencement of operation Public Issue of shares Trading of shares on Dhaka Stock

April 27, 1989 September 12, 1989 March 28, 1994 June 23, 1994

   

Exchange First dividend declared Authorized capital increased Launch of Fixed Investment Products Commencement of Factoring

April 20, 1995 May 18, 2000 September 2005 October 03, 2005

Operation Commencement of Extended Head

June 13, 2008

Office (Noor Tower) Commencement of Training Centre

May 15, 2010

(Northern S.R.Tower) 1.1.2 Branches Opened ULC has opened eight branches so far. The name of the branch offices of ULC with their opening date is given below:          

Chittagong Branch Jessore Branch Gazipur Branch Bogra Branch Sylhet Branch Rangpur Branch Chudanga Branch Bongshal Branch Feni Branch Barishal Branch

June 16, 1994 December 26, 2005 February 19, 2006 June 19, 2006 February 27, 2010 November 23, 2010 December 14, 2010 January 23,2011

1.1.3 Board of Directors Chairman Mr. Imran Ahmed

: Nominated by : Lawrie Group Plc of the U.K.

Directors Mr. Peter John Field

: Lawrie Group Plc of the U.K.


Mr. A. Rouf Mr. S. Aziz Ahmad Mr. M. M. Alam Mr. M. A. Azim Mr. M. Moyeedul Islam

: Macalms Bangladesh Trust : Surmah Valley Tea Company Limited : The Allynugger Tea Company Limited : The Chandpore Tea Company Limited : United Insurance Company Limited

1.1.4 Shareholding Structure ULC was formed by reputed foreign and local institutions in collaboration with International Development Agencies. It was granted license under the Financial Institutions Act, 1993. Particulars Authorized Capital Paid-up Capital

Taka 1000 million 528 million

Shareholdings of Associated companies and other related parties: Name of Shareholders United Insurance Co. Ltd. Lawrie Group Plc, U.K. Surmah Valley Tea Co. Ltd. Duncan Brothers (Bangladesh) Ltd. Macalms Bangladesh Trust Octavius Steel & Co. of BD Ltd. The Lungla (Sylhet) Tea Co. Ltd. Camellia Duncan Foundation The Chandpore Tea Co. Ltd. The Allynugger Tea Co. Ltd. Amo Tea Co. Ltd. Chittagong Warehouses Ltd. The Mazdehee Tea Co. Ltd. Duncan Products Ltd.

No of Shares 544,845 528,000 218,425 26,400 25,453 18,857 15,313 3,019 1,846 1,570 1,620 1,572 1,569 1,568

Shareholding 20.64% 20.00% 8.27% 1.00% 0.96% 0.71% 0.58% 0.11% 0.07% 0.06% 0.06% 0.06% 0.06% 0.06%

1.2 Business Vision 1.2.1 Vision To be the leading financial institution in the markets we serve. 1.3 Target Market Small and medium scale companies who are at the same time low profile good performers and potential performers as well are the target market of the ULC. The low profile good performers are those who perform very well in business due to sincerity and devotion of the sponsors though they lack proper management structure, and professional financial reporting. The potential performers are the companies which have no proven record but have identified


themselves as good projects and are sincere in approach to exploit the business. In a nutshell the main targeted customers of ULC are those companies who have potentiality, sincerity and devotion, but are in a position, that are not favorable to overcome the rigid procedures for loan financing but badly in need of investment in equipment to grow. Since the large, well performing companies enjoy lower business and financial risk, they are persuade by all financial organizations and they have the opportunity to shop around for cheaper credit package. So leasing is not attractive to them. But due to low credit risk, they may be offered lower rate lease package for their pursual. Among these blue chips, those who want to finance equipment without straining the existing credit line may become within the focus of ULC. Also the sister concerns of well reputed large companies, even though they are green fields may come forward for the services of ULC. 1.4 Operational Techniques of ULC 1.4.1 Business strategies Product strategy: At present, ULC offers only financial equipment leases. But to maintain its present growth and to grow further in increased competition from other financial institutions, it has a plan to diversify and enlarge the product package i.e. introducing Consumer Hire Purchases, Asset Credit Scheme, and Syndicate Leasing etc. Pricing Strategy: Lease pricing comprises of (a) Cost of Fund. (b) Administrative Cost. (c) Risk Premium and (d) Targeted Profit. Out of these, the Principal component is the cost of fund, followed by administrative cost. ULC is in continuous search for low cost of funds to reduce the lease package price by reducing cost of fund, prudent borrowing, and efficient fund management. The management is starving for increased local bank credit and call-loan facilities, in conjunction with maintaining low administrative cost efficiently. Portfolio Strategy: Now the lease portfolio of ULC concentrates in the textile and export oriented garment sector. This position is also true for the competitor of ULC, except the competitor’s portfolio extends to some other prospective sectors like chemicals and pharmaceuticals, leather and ceramic etc. The portfolio strategy of ULC focuses on the philosophy of profitable diversification and appropriate weight age according to the performance of potential. Management is always trying to find and explore the possibilities of new and potential sectors.


1. Operational Area Strategy: Chittagong branch’s activities helped ULC to expand its area of operations. ULC, like its competitor, operates only in two major metropolitan cities. Rajshahi and Khulna are still out of focus due to a few existence of economy of operation. But ULC is following the track of economy and development to explore the area of operation. Construction of the Jamuna Bridge may open up new opportunities for its operation which will connect the country’s Northern part and Southern part. To find the now area of operations, ULC executives are maintaining continuous touch with the businessmen of the unexplored areas. 2. Promotional strategy: ULC’s Marketing activities are to attract right clients only and avoid wrong ones by establishing a corporate identity and increase client awareness. Advertising: Good adverting always attracts people but not always the right people. That is why ULC uses advertising is a limited way. However, ULC is continuing its advertising in selected business publications to make entrepreneurs aware of the availability of this new mode of finance. Promotional Campaign: ULC and IDLC jointly organized a seminar on leasing in October, 1993 which attracted good attention and they have plans to organize more of these in future. (a)

Direct selling: This includes identification of prospective clients, and calling upon them directly. This may sometimes result brusque repudiation but most of lease agreement resulted from this strategy. ULC emphasizes on maximum practice of this strategy by making 2 or 3 visits a day with proper record to follow-up. It is the most effective strategy for marketing promotion so far adopted by ULC.

1.5 Organizational Structure: 1.5.1 Regional Business Heads The regional business manager acts as the regional business chief of ULC in his territory and provides all kinds of services to its customers. 1.5.1.2 Corporate Finance The main responsibility of the corporate finance department is to design and offer diversified products and services to the corporate clients. The corporate clients as a market have different financing needs. The services and facilities offered to the corporate clients are different in many aspects from those offered to the small and medium clients. Most of the corporate clients are renowned business conglomerate of the country. So understanding the financing


needs of the corporate clients requires understanding the business of clients as well. Since the performance of the corporate clients is affected by the business cycle, understanding the activities requires profound knowledge of the overall economy. The size of funds disbursed to the corporate clients is significantly big compared to the funds disbursed to the other clients. That is why corporate financing activities require greater effort in the risk assessment and risk mitigation process. The services provided by the corporate financing department fall into two major categories which are financial lease and term loan. 1.5.1.3 Factoring ULC has always diversified its product basket in order to serve the market in a more proficient way. In this regard factoring department has been established to provide customers factoring product. Factoring of Accounts Receivable is a mode of financing receivables arising out of supply of goods or delivery of services on credit. This revolving short term financing facility enables the suppliers/ service providers to realize the maximum portion of the payment soon after the delivery is made to the buyer. Particular job requirements of factoring department are as follows: •

Provides detailed reports on the sales ledger to clients or suppliers in order facilitate them in making prudent management decision.

Following up collection in a structured process and ensures physical collection of payment from Buyers located at different geographical locations.

Assisting the Client by making suggestion about the credit rating of a Buyer and thus enabling the Client to fix proper credit limit for each Buyer.

1.5.1.4 Financial Institutions ULC in order to serve the corporate clients in a better way participates in syndicated financing. ULC participates in such financing either by acting as the lead arranger or as a common participant. As a lead arranger ULC finds the right consortium partners and negotiate acceptable terms and conditions for all concerned parties. The particular job responsibilities of the department are as follows: •

Conducting due diligence of the client

Preparation of Information Memorandum

Distributing IM to the targeted financial institutions

Preparing legal documents and coordinating disbursement


1.5.1.5 Investment Marketing The Investment marketing department is mainly engaged in the act of deposit marketing. The depositing marketing activities involve selling different deposit products to individuals and thus maintaining a sustainable source of funds for the organization. Since the authorized capital of the NBFIs are restricted to BDT 500 million by the regulation, for funds ULC has to rely on banks or other financial institutions. The long term borrowing from the financial institutions was never a sustainable source of funding. With the introduction of deposit marketing a significant portion of the funds can be now collected from the depositors with relatively low cost of capital. The fund collected from the depositors reduces the overall cost of funding for ULC and dependence on the source of funds. With the change in the economic conditions the need for fund also changes. So the deposit marketing department has to adapt their activities to the changing economic conditions. There are different deposit products that allow depositors to deposit their savings for different time spans with varied return. Term Deposit, Earner Scheme, Insured Deposits Scheme are the major products marketed by the Investment Marketing Department. 1.5.1.6 Small Enterprise Financing The organization and operation of the small enterprise is different from those of the large enterprises. So it was inconvenient for the corporate financing department to provide services to both the large and small enterprises from the same platform. The Small enterprise financing department works to cater the unique financing needs of the small enterprises. The operations of the small enterprises are unique in many aspects. The do not follow all the standard business practices properly. In many cases it is hard to find necessary documents required for the disbursement of funds. So, financing small enterprise clients requires more judgmental analysis than quantitative or structured analysis. It is also important to maintain strong relationship with the proprietor of small enterprises in order to collect the due amounts from them. Most of the small businesses do not have any regular or secured stream of cash flow. The unique need for fund has been identified and met through different funds and schemes. The rate of credit default is high in the small enterprise sector but at the same time the margin is also high in this type of financing. Also to cater the need of the clients ULC offers diversified and innovative products depending on the business type, requirements of the clients. The major products that small enterprise financing department offers are Agrani, Briddhi, Mousumee, Nokshi, Bunon, Sristi, Dhara which are explicitly designed to meet the demand of different types of clients.


1.5.1.7 Regional Small Credit Heads In order to provide smooth and efficient service to its small credit clients ULC segregated and established regional small credit departments in different branches all over the country. The task was previously performed from the main branch but now the clients can avail the service from regional branches. The decentralization of credit department is aimed to facilitate better and efficient services to its small credit clients who live outside Dhaka. 1.5.2 Risk Management Risk management department 1 was established in order to mitigate potential losses resulting from failure of clients to meet their obligation. In this regard the department tries to mitigate future risk of investment exposure by analyzing the current market situation, analyzing client’s market specific and business specific risks. The department also applies various risk assessment analysis and appropriate risk management tools in order to assess and find the level of client’s exposure to different type’s risk, vulnerability of the client to various businesses specific and market specific risk and client’s capability to successfully withstand those kinds of risks. 1.5.2.1 Markets The Market Department analyzes the current market situation, conducts industry analysis in order to find out industry specific risks and prospect of different types of industry in probable macro economic conditions. The department conducts following activities: Industry Analysis and Industry Scoring Industry Analysis is a marketing tool used to analyze several aspects of the industry to determine if the company can make a profit in the market. Analyzing economic factors, supply and demand, competitors, future conditions and government regulations help management decide whether to enter an industry or invest money elsewhere. Markets department prepare the Industry Analysis for different industries. This department also assigns a Industry Score on different industries depending on the factors mentioned before. Industry Benchmarking Industry Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Industry benchmarking process is now under construction under the markets department of the company.


Risk Review Matrix (RRM) Markets department uses Risk Review Matrix as a tool in the risk assessment process. The company management concludes about the risk of financing a firm from RRM. The department finds different information under different categories which is important and influential in the financing decisions and assigns weight to them according to their importance. The point that the individual firm gets under each category is multiplied by the weight assigned to it. The total risk is the sum of the individual risks. 1.5.2.2 Credit: Credit department mainly comprises of two different departments, Credit – Corporate, Enterprise financing & Channel financing (CEC) and Small Enterprise Credit (SEC). Credit (CEC) works in order to ensure that at the time of credit origination, risks are acknowledged and mitigated so that credit losses and collection costs are minimized. It also recommends appropriate methodologies in order to minimize lending risk for the quantifiable financial risks. It also ensures effective exercise of all credit principals and adherence to all regulatory requirement and company policies in all lending activities. On the other hand credit (SEC) ensures effective execution of credit principles are in place and exercised while maintaining best credit approval processing time for all small enterprise clients at the time of credit origination so that risks are acknowledged and mitigated to minimize credit losses and collection costs. Credit (CEC) conducts reviews of all credit applications or items of Corporate, Enterprise Financing & Channel Financing to be considered for approval/reviewed by the Credit Committee/Managing Director/Executive Committee. It also executes annual review of recurring clients and updates lending guidelines/credit policies as and when required. Credit (CEC) also conducts Credit Committee (CC) meeting when called. Credit (SEC) deals with small clients and that is why their job responsibility also differs from credit (CEC). This team visits all prospective clients before preparing the credit appraisal report and prepare credit assessment report and inform RM as well as SE Head about the risk factor identified during the visit. They are also responsible for preparation of credit appraisal report of all proposals which are submitted to the management for approval. They also raise credit issues to the RM and continue correspond with branches for solving the issue. The team updates and circulates in hand proposal’s status to the Dept Head and Head of SE. Credit (SEC) is also the


custodian of credit assessment report of small enterprise and quotation file. 1.5.2.3 Departmental control Basically the departmental control department is in charge of ensuring the compliance by other departments in every step of the credit approval process .it is the responsibility of the departmental control to make sure that all the concerned departments has followed each of the standard procedures in the process of the credit approval. Apart from monitoring the compliance process departmental control is also responsible for smoothening of the credit approval process. One major responsibility of departmental control is to reduce the bureaucratic lingering that is caused in the name of control. So Departmental Control deals with a very tough task that calls for a balance between control and coherence. 1.5.2.4 Product development The product development department is in the charge of designing and developing new products and services after studying the market. The process of product development calls for extensive analysis of the economy, market, industry and needs of the client. Strategically product development is a very important department for ULC since it is responsible for ensuring the strong presence of the organization in all the important segments of the market. This department introduces new products so that the organization can cope up with the changing market needs and is always on the right track. 1.5.3 Credit Risk management Risk management 2 department deals with the operational matters needed for execution of disbursements and facilitates all kinds of operational activity which are needed to be done to mitigate any kind potential risks. 1.5.3.1 Operation The operation department conducts all the required documents prior to the disbursement. Necessary documents include application from the clients, quotation/ bill/ delivery challan/ Bill of entry, relevant organizational papers from the clients and approved credit appraisal. The operation department also sanctions related documents for disbursement and thereby officially executes disbursement order. The operation department is also liable for import related required works. The department inspects the particular leased asset in order to find out whether the asset complies perfectly with the documents and ensures the asset quality and appropriateness.


Operation department also maintains various kinds of related documents i.e. master, credit and security documents in order. Operation department also releases security documents against respective lease or loan sanctions. 1.5.3.2 Collection and special asset management Collection process mainly works for managing Post Dated Check (collected from the operation department) & collecting the respective rent. The structure of collection department is shown as follows: Team 1: Lodgment: •

The lodgment team collects PDC from operation department, acknowledges the clients of the receipt and ensures the maintenance of all the PDC in the system for future reference.

The team executes cheque lodgment in respective bank account and also send acknowledgement about the execution to respective department or person.

Executes necessary steps against dishonored cheques and updates the system accordingly.

It also responds to all queries regarding PDC and provides operation department required information regarding PDC.

Receives cash or cash deposit slip and prepares daily cash statement.

Team 2: Chaser: •

The team maintains follow up with the clients in order to collect overdue amount for dishonored cheques.

Upon failure to meet disbursement obligation on the part of the client the lodgement team instructs team 2 to follow up with the default client.

The chaser team then takes necessary steps for collection

Maintain collection document against Late payment Charge (LPC) and updates the system and concerned person with collection information.

In case of failure to collect overdue amount from the clients after certain period depending on the judgment of respective follow up officer (usually overdue position 1-3) the task is delegated to team 3 or follow up team.

Team 3: Follow up:


Team 3 follows up default clients after being delegated by the team 2. They follow up the default clients extensively for a certain period (usually from overdue position 3-6)

Tries to regularize the clients by improving their default status.

The team prepares weekly and monthly overdue report and updates the collection account if required.

In case of failure to collect overdue amount from the clients within specified period the team delegates the responsibility to team 4.

Team 4: Litigation: •

Team 4 or litigation team follows up the clients which are most difficult tract or most crucial clients with minimal level of compliance.

The team tries to follow up the clients and in case of failure to collect against the LPC the team launches punitive measures.

They execute all necessary legal steps against the clients and conduct law suit.

The team also takes appropriate steps to recover the leased asset and sell recovered asset through auction notice.

The team also conducts lease/ loan agreement termination process with the defaulted clients.

Litigation team maintains database of lawsuits against the clients, updates the database and acknowledge the respective committees by preparing overdue, EC and MANCOM report.

1.5.3.3 Administration Department The administration department is primarily responsible for all kinds of administrative activities needed to ensure sound operational environment. The major activities of the department are as follows: •

Maintenance of all office vehicles and requisition related activities of those vehicles.

Conduct all types of procurement (except IT equipments).

Checking and verifying the car loan process.

Maintenance of corporate mobile SIM and set and telephone connection (including PABX, Intercom), and insurance for the same.

Maintenance of all office equipments & store.

Administrate the maintenance stuff (peon & drivers).


Maintenance of all fixed assets and arrange the disposal of fixed asset, expired documents/files, and other materials.

Arrange day to day miscellaneous fund requirements.

Branch offices Maintenance, branch office Petty cash bill check and arrange disbursement.

Brand Management.

Looking after ULC zonal office rental matter, making agreement, preparing possession paper, payment of monthly rent, development and decoration work, repairing and renovation work etc.

Maintenance of payroll and deposit associates information (joining, resignation, increment, bank account) update and prepare their salary and commission information.

Recruitment of security service, making agreement, maintaining and ensuring their services.

Maintenance of all employees’ leave management and attendance record.

1.5.4 Risk Grading The department analyzes the overall loan and lease portfolio of the organization retrospectively and then tries to construe future potential default probability. The main objective of the department is to mitigate credit risk by analyzing the portfolio and there by forecast about the future effectively. The department also works in order to develop appropriate risk management tools and structured analyzing procedure needed for better understanding of the client’s risk exposure. The department’s major sub-departments and job objectives are as follows: 1.5.4.1 MIS MIS is the centralized reporting department in ULC. The main objective of this department is to provide reliable information in the system. They also organize, analyze and interpret data to produce external reports for different regulatory bodies and internal reports for the management. Internal reports are made monthly and external as per schedule. Ad-hoc reports are also made when required. External reports are submitted to external bodies such as Bangladesh bank, IFC, CBSF, BLFCA, BOI, SEDF etc on monthly, quarterly, half yearly and yearly basis. The reports are


Highest Interest Rate Differential Financial Institutions, Statement of Doubtful and Unusual Transactions, Monthly Statement of Business Performance, Cash Reserve Requirement, Statutory Liquidity Reserve, Statement of Reschedule, Statement of Net Asset, Statement of Write off, Statement of Classification of Leases and Loans, Statement of Capital and Liability, Industrial Loan in Government and Private Sector, Report for Credit Information Bureau (CIB) Database, Quarterly Statement of Lease & Other Finance to Non-bank co’s Director, Quarterly Statement of Lease & Other Finance to Bank co’s Director, NBDC (Nonbanking Depository Corporation) return, Statement of Shareholding and Particulars the Directors, Statement of Foreign Direct Investment. Internal reports are made from the verified generated data for internal use only. These are prepared on monthly basis. Major reports include Business Performance, Contract and Disbursement, Overdue, Group Exposure, New Customers, Portfolio, Deposit Mobilization, Collection, Quarterly Management Report etc. 1.5.4.2 Portfolio Review The portfolio management team works in order to mitigate the overall credit risk by efficiently analyzing the total portfolio and then effectively predicting the potential credit default probability. Major job responsibilities of the team are as follows: •

The team manages the grading model developed to assess different types of risks of clients’ i.e. financial risk, management risk, business risk, credit risk, market risk etc. The grading model management and ensuring the most efficient use of the grading model is another responsibility of the portfolio review team.

In order to ensure compliance on the part of the regional manager the team evaluates the credit appraisal reports supplied by the RM and grades the RM in accordance with their compliance with the grading model. The team also prepares grading of the regional managers’ in accordance to their compliance with the risk evaluation process of the respective clients.

The team is also responsible for conducting early alert report. By analyzing the individual clients’ credit appraisal report the team tries to assess all kinds of risks and also finds the potential vulnerable clients for whom potential of failure to meet credit obligation is high. Through early alert report the team acknowledges the top management about the clients who possess high probability of default and also notify


and prepare the respective RM of the client to take necessary evasive action against any kind of potential credit default. •

The team maintains Portfolio Matrix which shows portfolio condition over the period of time and transition of portfolio in relation with time. The activity facilitates time series analysis or trend analysis of the total portfolio of the company in order to evaluate the performance of the total portfolio over the analyzed period and thereby assists the top management in reaching decision regarding the credit approval policy.

1.5.4.3 Compliance The major responsibility of the internal control department is to ensure the adherence to regulations by conducting audit on all the department and branches of the company. It generates audit report and provides the report to the top management in order to acknowledge about various departments’ compliance with standard practice and good governance processes. The department evaluates and assesses the effectiveness of internal control process, risk management procedures,

and the quality of performance in carrying out

assigned responsibilities. So, the internal audit team facilitates the audit committee by conducting audit related operations on different departments. 1.5.5 Accounts and Treasury 1.5.5.1 Accounts The accounts department is controlled by Chief Financial officer (CFO). The job responsibilities of accounts department are to Prepare Monthly, quarterly and annual statements, which are required to facilitate smooth transaction process internally and externally. It also performs supervisory duties in order to maintain error free transaction. It also prepares various reports to meet the requirements of various stakeholders like internal audit, shareholders, Bangladesh Bank. The department is also responsible for preparing annual report, Kreditanstalt fur Wiederaufblan (KFW) fund and other transaction related schedules. Accounts department also prepare of daily treasury transaction related letters, Bangladesh Bank lodgments. 1.5.5.2 Treasury ULC treasury is controlled by Chief financial officer. The duties and responsibilities of this department include preservation of Credit line including OD facility without long term liability.


Call market review and fund utilization.

Asset/Liability management and reporting

Profit generation from precise fund management

Banking network enhancement.

1.5.6 Human Resource Management The HR department of ULC basically controls the most important asset of the organization which is its employees. The team manages the overall work force of the organization and aligns HR management with the strategy of the organization. The HR department of ULC mainly does four most important tasks which are given below. 1.5.6.1 Recruitment Recruitment refers to the process of attracting, screening, and selecting qualified people for a job. For some components of the recruitment process, mid- and large-size organizations often retain professional recruiters or outsource some of the process to recruitment agencies. The stages in recruitment of ULC include sourcing candidates by advertising or other methods, screening potential candidates using tests and/or interviews, selecting candidates based the results of the tests and/or interviews, and on-boarding to ensure the candidate is able to fulfill their new role effectively. 1.5.6.2 Training & Development In the field of human resource management, training and development is the field concerned with organizational activity aimed at bettering the performance of individuals and groups in organizational settings. The HR department conducts following activities : •

Training: This activity is both focused upon, and evaluated against, the job that an individual currently holds

Education: This activity focuses upon the jobs that an individual may potentially hold in the future, and is evaluated against those jobs

Development: This activity focuses upon the activities that the organization employing the individual, or that the individual is part of, may partake in the future, and is almost impossible to evaluate.


The “stakeholders” in training and development are categorized into several classes. The sponsors of training and development are senior managers. The clients of training and development are business planners. Line managers are responsible for coaching, resources, and performance. The participants are those who actually undergo the processes. The facilitators are Human Resource Management staff. And the providers are specialists in the field. Each of these groups has its own agenda and motivations, which sometimes conflict with the agendas and motivations of the others. 1.5.6.3 Performance Appraisal Performance appraisal, employee appraisal, performance review, or career development discussion is regularly conducted by the HR department in order to assess the job performance of employees. The evaluation is usually done (generally in terms of quality, quantity, cost, and time) by the corresponding manager or supervisor. A performance appraisal is a part of guiding and managing career development. It is the process of obtaining, analyzing, and recording information about the relative worth of an employee to the organization. ULC has always focused on development of employees by evaluating not only on performance rather on all the necessary aspects for enhancement the quality and productivity of the employees. The HR department regularly conducts training and other performance enhancing activities to bring the best out of its employees. 1.5.6.4 Compensation Plan HR also fixes the compensation package of employees of ULC where salary and other benefit include. They also set up the salary structure for different positions. 1.5.7 Information & Communication technologies Information & communication department provides all the necessary communication platforms needed for effective exchange of information to make the organization dynamic and efficient. Major job responsibilities ensues: •

Implement infrastructure inclusive of latest LAN components, Hardware and Software, communication equipments for our users to ensure maximum benefit from the network environment.

Implement and upgrade the programs, software and processes that result in efficiency of users’ performance.


Implement and upgrade security components like Antivirus software, security and monitoring software, administrative features and firewalls to protect company data to the maximum degree.

Maintain close contact with branches and HO personnel to determine their requirements and provide them support with appropriate problem and change management procedure.

Maintain IT inventory that includes systems information, hardware, software, LAN and communication equipments to determine status of IT components at any point of time.

Manage vendor relationships, search for alternative vendor and continuous follow up with them to ensure minimum downtime in case of systems (hardware, software, LAN etc) unavailability.

In house software development

Arrange training programs for our users and IT personnel to help them perform better in their respective area.

Resource Strength The resource strength of ULC comprises of following three major catagories: 1. General Management 2. Mid Management 3. Support Stuff. The total human resource in ULC is 150 employees where 58 of them in the management and mid management level. Rest of them is contractual and support stuff mainly working in the sales department. 1.5.8 Management committees 1.5.8.1 Asset-liability Committee The asset liability committee mainly deals with risks that are mainly related to the balance sheet of the company. The Alco is in charge of the issues that arises from and better defined by the liquidity and interest rate risks. Addressing these risks require the assessment and


analysis of the timing and duration of the cash flows that are related to the profitability of the organization as well. The major responsibilities of the committee include: •

Scrutinizing asset – liability or other balance sheet component and determine if the position is favorable for the company in terms of liquidity and interest rate.

Taking all the actions required to mitigate the risk arises from the asset liability position of the balance sheet.

Working on preparation and implementation of policies regarding the efficient management of asset, liability and other balance sheet component.

1.5.8.2 Anti money laundering Committee: This committee is formed and operated according to the guidelines of the central bank. The main concern of the committee is to supervise the formulation and implementation of the anti money-laundering guidelines to prevent from any incident of money laundering being taken place from a client account in ULC. The major activities of the committee are to: •

Constructing a policy that will help the company to prevent the incidents of money laundering

Develop a system that will help to identify the suspicious transaction in client accounts.

Properly submit the report on the suspicious transaction to the anti money laundering department of Bangladesh Bank on a regular basis

Conduct training and other knowledge development program to keep the employees updated with the most recent cases of money laundering

1.5.8.3 Management Committee The basic responsibility of the management committee is to review the initial credit proposals before submitting them to the Executive Committee of the board of directors for approval. It also scrutinizes the asset liability position of the company to make sure that maturity of asset matches the maturity of the liability and there is sufficient fund available for investment. The


management committee includes the members from the both the finance and operations department of the company. 1.5.8.4 Credit Committee (CC) Ensures credit risk associated with credit applications are properly understood and evaluated before the loans are approved. The credit committee is liable for follo wing responsibilities:

Review all credit proposals of Corporate, EF & Channel Financing prior to credit approval.

Prepare credit assessment report for all credit proposals and inform the Management about the risk factor prior to credit approval.

Prepare review report of recurring clients for limit sanction.

Prepare review report of recurring client for review only.

Must visit client before preparing review report. Also visit prospective & financed clients as and when required basis.

Help in developing new guideline and documents when required.

Custodian of credit assessment report, credit committee report, visit log & camera.

1.5.8.5 Audit Committee The Audit Committee operates with a view to assist the board of directors to perform its responsibilities concerning the financial and other related issues. The key objectives of the committee are to: •

Keep an eye on all the internal and external audit and the Inspection Program of the central bank

Scrutinize any financial issues related to the operation of ULC

Scrutinize if the accounting policies are in line with statutory and regulatory requirements

Review the internal control system

Review any internal or external audit report


Scrutinize the financial statements in the annual reports and other interim statements before submitting to the Board of Directors

Supervise the financial reporting system to ensure the reliability and timeliness of the information provided to the Board.

1.6.1.1 Sanchay Scheme Sanchay scheme allows an individual to deposit on monthly basis and at the maturity he will get a substantial amount of return with interest. It is a safe investment with high return. Any Individual or Firm or Corporate Houses are eligible to participate in the Deposit Scheme of ULC. Sanchay scheme is flexible and diversified product which is tailored to one’s needs and require no incidental costs. Premature encashment is allowed after completion of minimum duration. There are three types of Sanchay schemes: Sanchay Scheme (monthly) Millionaire Scheme Easy Millionaire Scheme Monthly sanchay scheme does not require initial deposit. Millionaire scheme requires initial deposit and minimum duration is 3 years. 1.6.1.2 Term Deposits Under this scheme, an individual’s money is deposited for a fixed period of time and interest is capitalized with the principal at each year. The term deposit cannot be encashed before 1 year. The profit is subject to deduction of AIT accordance to the prevailing govt. rules and regulations. Senior citizens (individuals aged 57+) will get 0.25% higher profit rate under all the deposit schemes other than fixed term investment schemes (Double money, Sanchay and Millionaire schemes.) ULC offers following term deposits: Annual Profit Term Deposit It is a fixed return investment that allows an investor to withdraw or reinvest profit or principal at maturity.


Earn Ahead Term Deposit This scheme offers anyone interested to invest an opportunity to benefit from his investment at the time of opening account. Also allows him to reinvest withdrawal amount for further benefit. Cumulative Term Deposit Under this scheme profit from anyone’s invested amount has been capitalized at the end of each year (after AIT deduction), creating a new principal. Profit for next year is then being calculated on the full amount. Double money return Due to attractive profit, investors’ investment becomes double at maturity. 1.6.1.3 Earner Scheme An investor will receive a fixed monthly or quarterly return against your deposit. This is an ideal scheme for senior citizens who wish to preserve their retirement funds and at the same time want to earn interest to meet recurring expenses. Minimum deposit amount for quarterly and monthly earner deposit scheme is Tk 50,000. Earner scheme is available for both individual and institutional customers and term of the scheme is 12 months. Like Sanchay scheme it is also a safe investment with high return and require no incidental costs. Premature encashment is allowed after completion of minimum duration. There are two types of earner schemes: 

Monthly earner deposit

Quarterly earner deposit

1.6.1.4 Insured Deposits Scheme (IDS) It is an unique monthly savings scheme that gives the depositor an opportunity to save money for the future as well as obtain peace of mind that the scheme benefit will be paid even in case of sudden demise of the depositor. The monthly installments have built-in life insurance coverage that assures the receipt of the maturity value of the deposit by the nominee of the depositor, in case of depositor’s death due to any cause (excluding pre-existing illness/disability, AIDS, suicide, murder or assault, war


or warlike operations etc. details of which will be available in the original Group Insurance Policy Contract). IDS has some terms and conditions like multiple deposit schemes are allowed, but cumulative monthly deposit shall not exceed Tk. 10,000. Installment must be deposited through Cheque/Cash within 25th day of each month at the bank nominated by ULC. Initial deposit must be made by cheque only in favor of ULC. The scheme will be closed if three consecutive monthly installments are not paid within stipulated time and there can be more than one beneficiary for a single IDS Scheme. If share of Multiple Beneficiaries are not specified, all beneficiaries will share equally. 1.6.1.5 Quick loan In order to meet someone’s unexpected requirement ULC provides quick loan against his deposit amount with ULC. Quick loan can be availed up to 80% on the investment amount but loan interest rate will be 2% higher than the deposit rate. 1.6.2 Secured Finance 1.6.2.1 Lease Finance ULC provides lease financing facilities to all market segment of customers, Small & Medium Enterprises, Commercial Houses, Large Corporate organizations. Under this facility ULC provides industrial machinery and motor vehicles at concessionary term, machinery and furniture for hospital use, truck or bus for transportation and equipment or furniture for official use. ULC provides 80%-100% lease financing for a period of 3-5 years. Thereby, one can avoid capital investment and utilize fund elsewhere. Lease financing at ULC are customized into number of facilities like, lease local, sale & lease back and lease foreign. That allows anyone to lease new or existing asset from local or foreign vendor. As ULC is providing capital or financial lease, at the termination of contracts he will have the opportunity to renew the lease or purchase the asset with a minimum transfer price. Construction of repayment schedule using this method allows one to pay lower interest as principal payments are gradually adjusted with receivables. 1.6.2.2 Term Finance Term finance is designed for the longer term business purposes where main theme is to meet up the purpose of working capital finance, generate profitability and consolidation of the


customer’s expansion objectives. ULC provides minimum loan amount of Tk1 lakh for new and existing client. A client’s installments can be structured as monthly, quarterly, semiannually or annually to match with his cash flow generation. One can prepay and adjust full or partial amount with the loan account only after adjustment of first six loan installments. 1.6.2.3 Small Loan Small enterprises play an important role in the economic and social development of our country. They create millions of jobs and increase the competitiveness of our economy. To meet their requirement ULC further customize it’s facility into small loan facility as follows: 

Nokshi

Mousumi

Agrani

Briddhi

Nokshi is a business loan scheme for women entrepreneurs, at a modest rate, for the purpose of working capital finance to the small and medium sized enterprises. It provides a loan amount up to 500,000 BDT. Agrani is a business loan scheme for the purpose of working capital finance to the small and medium sized enterprises. Agrani provides a loan amount up to 600,000 BDT. Mousumee is also a scheme for working capital finance to the small and medium sized agrobased manufacturing industries (agricultural equipment and spare parts). It allows a loan amount up to 500,000 BDT. Briddhi allows a loan amount up to BDT 1200,000. 1.6.2.4 Home Loan ULC offers home loans for purchase/construction of house/apartments, renovation/extension of existing house/apartments, construction/purchase of commercial building, construction of commercially viable project like school, hotel, hospital etc. and construction of industrial building like factory, godown, warehouse etc. Maximum loan amount is Tk 50 lacs or 70% of the purchase price/cost, whichever is lower and the repayment term for 15 years for normal facility and 20 years in case of Bangladesh Bank refinancing scheme, but not beyond the 60th birthday of the applicant. Repayment term for commercial loan is maximum 7 years.


1.6.3 Corporate Finance 1.6.3.1 Syndication Loan For project requiring large-scale investment, ULC brings other financial institutions to raise funds through syndication where ULC acts as the lead arranger for the financing. ULC’s job in this area is to find the right consortium partners and negotiate acceptable terms and conditions for a customer. The entire process is usually completed within 3-6 months. However, this may vary based on the complexity of the deal. These service requires conducting due diligence of the client, preparing Information Memorandum (IM), distributing IM to the targeted financial institutions and preparing legal documents and coordinating disbursement. 1.6.4 Channel Finance ULC provides loan facility up to certain limits. Channel financing refrain a customer from further credit to pay off suppliers, as funds are directed to Channel partners. Suppliers or Customers will receive payments right after the delivery of goods or services. Therefore funds are no longer tied up in receivables. Release of funds from the Balance Sheet results in improvement in financial Ratios. 1.6.4.1 Work-order Finance Under this arrangement STF is provided against a client’s Work Order, helping him in receiving a significant portion of order amount before the delivery of goods or services. Thereby ensures schedule implementation of his project. Work-order facility is available to all industries that provides services or deliver products to corporate entities i.e. institutional buyer/ debtor. 1.6.4.2 Factoring Factoring of Accounts Receivable is a mode of financing receivables arising out of supply of goods or delivery of services on credit. This revolving short term financing facility enables the suppliers/ service providers to realize the maximum portion of the payment soon after the delivery is made to the buyer. 1.6.4.3 Distributor Finance This arrangement ensures better flexibility through sales expansion or sales retention without trade credit facility. Also allows a client to impose limits on cash discount, bad-debt losses, and opportunity costs.


2. Risk Management at ULC 2.1 Review of Credit Appraisal Report Credit reviews all credit appraisals before submitting it to the approving authority. Credit review ensures following risk areas of a prospective borrower. 2.1.1 Borrower Analysis (Management/Owner/Corporate Structure Risk) The majority shareholders, management teams and group or affiliate companies need to be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions to be addressed, and risks to be mitigated. The following questions are asked to assess the Management Risk: a. Who is the borrower? Does any particular/specific characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of the Trust Deed. b. Are there adequate abilities and experience in senior management? c. Is there adequate depth and succession planning? d. Is there any conflict amongst owners/senior managers that could have serious implications? e. Is the credit Officer satisfied about the borrower? 2.1.2 Industry Analysis (Business and Industry Risk): The key risk factors of the borrower’s industry need be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces (demand and supply gap) to be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Credit Officers can collect data from statistical year book / economic trends of Bangladesh Bank/ public report/ newspaper, journals etc. The following questions are asked to assess the Business and Industry Risk: a. Are there any significant concentrations of sales (by customer, industry, country, and region)? b. How does the borrower rate with its competitors in items of market share?


c. Can increased direct production costs be passed on to customers? d. Does the borrower deal in any specific product that may be subject to obsolescence? e. Is the purpose of borrowing consistent with the objectives of the company? f. Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued by the Bangladesh Bank/ Head Office? 2.1.3 Supplier/Buyer Analysis Any customer or supplier concentration needs to be addressed, as these could have a significant impact on the future viability of the borrower. 2.1.4 Market Risk The sufficient marker data is to be obtained to identify client’s market share in the industry/demand-supply gap in the market. 2.1.5 Technological Risk The product that is manufactured needs to be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle needs to be understood. Technical aspects of the products must be addressed. The Credit Officer must be satisfied with the mitigating factors of technical risks, associated with the product. 2.1.6 Financial Analysis: An analysis of a minimum of 3 years historical financial statements of the borrower need to be presented. Where reliance is place on a corporate guarantor, guarantor’s financial statement to be analyzed. The analysis addresses the duality and sustainability of earnings, cash flow and the strength of the balance sheet. Specifically, cash flow, leverage and profitability ratios are analyzed. In this regard CO looks into the status of the audit firm. A projection of the borrower’s future financial performance is provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loan is not granted if projected cash flow is insufficient to repay debts. The following questions are asked to assess the Financial Risk: a. Does the borrower produce financial statements on time? b. Is working capital adequate?


c. Has the customer actual title to stock? d. Have financial covenants been met? e. Has there been any major sale of shares by directors? f. Any significant change in asset conversion cycle? 2.1.7 Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc.) need to be assessed. In this regard the Credit Officer looks into account turnover like debt summation/ credit situation/ highest debit balance/ highest credit balance (or lowest debit balance), no. of debit entries/ no. of credit entries for the last three years. 2.1.8 Adherence to Lending Guidelines The Credit Application/ Appraisals need to be prepared in line with the Company’s guidelines. It must be clearly stated whether or not the application / proposal is in compliance with Company’s Credit Policy lending guidelines. Related questions to be addressed are: a. Is proposed application in compliance with Company’s guidelines? b. Does the lending to clients also compliant with Central Bank’s guideline? 2.1.9 Interest Rate Risk The interest rate may be fixed or floating based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and loan period risk. Interest rate also arises from the movements of interest rate in the market. In assessing the pricing and profitability, related questions to be addressed are: a. What is the rate of interest charged? b. Is the rate fixed in consideration to the risk factors? c. Will the rate charged be profitable to the company? 2.1.10 Foreign Exchange Risk The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Credit Officer needs to take care of the Foreign Exchange Risk. The questions to be addressed:


a. Does the business involve foreign currency dealings? b. What are trends of foreign currency fluctuation? 2.1.11 Cost Overrun Risk This type of risk is generally involved in taking project finance decision. A high degree of cost overrun may cause the failure of the project. Therefore the CO considers the cost components of the project and their chance of devaluation. The questions to be addressed: a. Whether the construction cost may increase? b. Whether the imported machinery cost may increase for the fluctuation of the foreign currency? c. Are all types of cost components addressed during preparation of feasibility report? d. Does sensitivity analysis prove sufficient shock absorbing capability of the project? 2.1.12 Loan Structure: The amount and tenure of financing proposed needs to be justified based on the projected repayment purpose. Excessive tenor or amount to business needs increase the risk of fund diversion and may adversely impact the borrower’s repayment ability. Related questions to be addressed are: a. Are facilities justified by the borrower’s business? b. Are any capital /long term expenditure being financed by short time borrowing? c. What is the amount required? Is it sufficient or excess for the purpose mentioned? 2.1.13 Security A current valuation of collateral needs to be made by RM and the quality and priority of security being proposed needs to be assessed properly. Loan is not granted solely on security consideration. Adequacy and the extent of the insurance coverage are assessed. The CO looks into client’s interest/ dependability on the collateral offered as security. a. Is security offered acceptable and adequate? b. Has all the security been perfected in accordance with the loan application? c. Have any valuation and inspection been undertaken since the last application?


d. Has the credit rating of the borrower deteriorated and is it required to have additional security? e. Can a valid charge be obtained on the security?

2.2 How to Assess Credit Worthiness of a Customer 2.2.1 Credit Risk Assessment Process Checking the credit worthiness of a client is an important process to gain the knowledge necessary to make an informed decision on their level of credit risk. The decision process should be undertaken for new clients before work commences and for existing clients before a new matter is undertaken. Periodic reviews may also be required. The process of assessing credit can be compiled into three steps: 1. Gathering the required information 2. Analyzing, reviewing and assessing the information 3. Making an informed decision 2.2.2 Information Gathering The first step of credit assessment process is to gather the required information about a potential customer. The minimum information that should be obtained from a prospective client includes: 

Certificate of Incorporation

TIN certificate

Articles of Association

Shareholders’ Particulars

Additional information that may be requested from clients and used in the credit assessment includes:


• Incorporation date or time in business • Number of staff • Financial data Relevant information from Sole Traders, Partners and Individuals would include a Statement of Assets and Liabilities. Financial Data Analysis of recent historical financial data will provide a good indication of the financial strength of a business, and when the amount of credit granted is significant, this information should be requested. Other information that may be sourced from credit reporting agencies include: • Parent and associated companies • Line of business • Directors names, background and other boards • Registered charges • Court actions, insolvency notices • Number of trade reference and other enquiries 2.2.3 Analysis, Review and Assessment When you have the information you can assess it. 1. Complete and accurate data: In the first instance, it should be confirmed that the information that has been provided is complete and accurate. If the entity is deregistered or any data is unmatched, the application should be held until it is clarified that the status and have the correct information. 2. Commencement of Business: The date of incorporation or the start date of the business is a good example. Statistics gathered and published by credit reporting agencies and government regulatory authorities over many years show that there is more likelihood that a business will fail in its first few years than if it is established a long time. The date of incorporation or date


the business started can be used to calculate the years and form part of the decision making data. 3. Size of the Business: The number of staff will assist in evaluating the size of the business, on the basis that a small business has a higher risk than a large business. Part of that premise is that bigger businesses are likely to be more established with more staff in various capacities with more controls and less single dependencies. 4. Business Experience: The age of individuals gives a guide to their years of business experience. Directors, and their link to other companies, are very important. The correlation of failed directors to failed companies is alarmingly high. 5. Trade references: These are an effective way to ascertain an entity’s payment history and patterns with other credit providers, noting however that you may only be given ‘good’ referees. 6. Assessing Financial Data: The financial data of a business is the best source of information on its financial strength. In most instances, financial duress is evident long before the business fails. Information such as the growth in turnover, the profitability, the gearing and the asset base are good indicators of financial strength and can be measured using financial ratios. Figuring out operating cash flow is basically the task of computing the company's earnings before interest and taxes, added to depreciation, amortization, and other non cash transactions. All those numbers are listed on a company's "statement of cash flows," which public companies prepare for their annual reports. Finding out interest expense paid: Forget the interest-expense figure that you see on the balance sheet, which may be easier to find. There can be a large difference between the interest listed for tax purposes and the amount actually paid to banks, which you should request if it's not noted in the annual report. Dividing operating cash flow by interest expense paid. This ratio ranging three to one is good, which indicates that management has considerable breathing room to make its debt


payments. When the ratio drops below one, it clearly indicates management is under tremendous pressure to raise cash. The risk of default or bankruptcy is very high. 7. Adverse Information: If there is any adverse information such as Court actions or insolvency notices, you should consider the credit risk high. 2.2.4 Decision Making Based on an accumulation of the information, one should be able to make a judgment. If all the information is positive, he can accept the client and grant credit. If a lot of information or important elements are negative, e.g. there are court actions, decline credit. If there is some negative information, the decision maker should assess its impact on the creditworthiness of the client and then decide. Taking control of the information and building a database of one’s own clients will deliver the best assessments. Credit risk evaluation is an ongoing process. One could also profile his existing clients so credit assessments are carried out each time a significant new matter begins or if he becomes concerned when an account falls into arrears. Understanding the credit risk of each client will enable a manager to increase fee income safely.

3. Credit Appraisal in ULC Relationship Managers (RM) of all business units are free to solicit businesses of all sizes irrespective of their business unit. Also the branches have target to build asset portfolio across all business size/ product- large/medium, small and factoring. ULC has two different credit departments to identify risks of different businesses classified by size. They are: Small Enterprise Credit (SEC): 

Credit of small enterprises engaged in trading, services and manufacturing business.

Corporate and Enterprise Credit (CEC):


Credit of medium and large size companies in treading, services and manufacturing sector.

Credit of all revolving products (revolving loan, factoring, and pre-delivery finance) for clients of all sizes.

Sales/ Payable ledger audit for factoring, pre-delivery finance and revolving loan.

To determine which Credit to be involved in a particular finance, the client size has to be first ascertained. It is necessary to have a uniform definition to segregate and group clients into large, medium and small. Client size is defined by the range in which its Net Fixed Asset falls, as per the following table: Net Fixed Asset= Total Fixed Asset – Value of Land and Building - Accumulated Depreciation Sector

Small

Lower Medium

Upper Medium

Large

Service

50,000-5,000,000

5,000,001-

40,000,001-

100,000,001

40,000,000

100,000,000

and above

5,000,001-

40,000,001-

100,000,001

40,000,000

100,000,000

and above

50,000-

15,000,001-

80,000,001-

200,000,001

15,000,000

80,000,000

200,000,000

and above

Trading Manufacturing

50,000-5,000,000

Companies registered by RJSC as ‘Public Limited Company’ should be treated as Large, irrespective of the size of its Net Fixed Asset. Reference: ACSPD Circular No. 08, Bangladesh Bank, Dated 26 May 2008 It is necessary to segregate the SEC and CEC because the two segments require different attention. For SEC, it is very important to have person to person relationship as most of the time their business documents are not kept organized. On the other hand for CEC, organizations are more documents based and one can easily get necessary information who wants to check the credit worthiness of that particular client. 3.1 Small and Lower Medium Credit for small and lower medium sized clients are dealt with Small Enterprise Credit. They are trained and equipped to understand and identify the risks associated with small businesses. The credit approval process for small businesses is as follows: Client Information Report:


1. RM prepares Client Information Report (CIR) and forwards to Branch in Charge/ Regional Manager through National Footprint. 2. Branch in Charge/ Regional Manager reviews the CIR and uploads the CIR, if accepted. The CIR then comes to Credit – SEC. Mandatory Credit Visit to Client: 3. SEC downloads the CIR and initiates visit. RM forwards a visit schedule after discussion with client. After the visit a report with observation on the client is provided to the respective branch. Appraisal Preparation: 4. If accepted, scanned copies of all required documents are forwarded to credit for appraisal preparation. The appraisal is reviewed both by Head of Credit (SEC) and Branch in Charge. Approval and Documentation: 5. The Credit Officer (SEC) obtains approval of the appraisal. 6. The approved appraisal is the forwarded to Operations for preparation of documents as per approved terms. 7. Operations send the original appraisal to respective branch.

3.2 Upper Medium and Large The upper medium and large sized clients are dealt with Credit (CEC) because they have the required expertise to understand large businesses and identify risks associated with them. The credit approval process for businesses is as follows: Appraisal Preparation: 1. RM enters data in the National Footprint. 2. From the National Footprint, RM generates and prepares the appraisal in excel format. Credit Review:


3. The appraisal is forwarded to Credit (CEC) for the review. Credit (CEC) reviews the appraisal and forwards their observations separately to the approving authority. Approval and Documentation: 4. RM takes the approval and forwards the approved appraisal to Operations for document preparation. 5. Operations send the original appraisal to respective branch.

3.3 All Revolving Products Revolving products of both small and large group of clients require sales/ payable ledger audit and are handled by Credit- CEC. The credit approval process for businesses is as follows: Factoring, Assignment based, Work Order Financing: Sales Ledger Audit: 1. Credit Officer for Credit (CEC) visits the client and audits the client’s sales ledgers, work orders and related documents. The CO then prepares the sales ledger audit report, including the proposed limit. Sales Ledger Meeting: 2. The CO calls for a sales ledger audit meeting, with the approving authority and respective business originator, where the limit is approved. The CO informs the approving authority during the meeting about any of their observations. Appraisal Preparation: 3. CO enters data in the National Footprint and generates and prepares the appraisal. The appraisal is reviewed both by Credit Head (CEC) and Head of Business. Approval and Documentation: 4. The Credit Officer (CEC) obtains approval of the appraisal. 5. The approved appraisal is the forwarded to Operations for preparation of documents as per approved terms.


3.4 Revolving Loan, Distribution Financing: Visit to the Client: 1. The Credit Officer (CO) from CEC visits the client and gathers the required information from the client. Appraisal Preparation: 2. CO enters data in the National Footprint and generates and prepares the appraisal. The appraisal is reviewed both by Credit Head (CEC) and Head of Business. Approval and Documentation: 3. The Credit Officer (CEC) obtains approval of the appraisal. 4. The approved appraisal is the forwarded to Operations for preparation of documents as per approved terms. Credit Committee: Credit Committee (CC) Meeting is required for credit proposals where clients have group exposures above Tk. 30 million. The guideline for Credit committee is published. 1. After Credit has reviewed an appraisal, Head of Credit circulates its observations to all members of the Credit Committee and asks for their opinion. 2. The participants provide their opinion and these will be summarized and presented to the Chairman, Credit Committee. The Chairman reviews. 3. After review and completion of CC Meeting, the appraisal, along with the Meeting Minutes, is submitted to MD for approval/ recommendation. After approval/ recommendation of the appraisal, the CC Meeting Minutes is forwarded to the Credit for filling.

3.5 Online Appraisal Process Chain Mail Process for Appraisals The approval process for appraisal is done through a chain of emails. The process works as follows:


1. After preparing an appraisal, RM prints and signs the appraisal and scans all pages of the appraisal and creates a PDF file. The name of the file would be: Appraisal_(name of client)_(amount)_(date) 2. RM creates an email and attach the PDF file (Appraisal) and sends To: Regional Manager/ Relevant Business Head CC: ICCD, Portfolio Review Subject: Appraisal of (name of client) for (amount) RM ensures that the email is sent to all required receipts. 3. Regional Manager/ Relevant Business Head review the Appraisal and forward the email to Credit with recommendations. 4. Credit review and attach their observations as a separate file, with the original email and forward to DMD for recommendation or approval. 5. DMD does telephone conversation or meeting with the Relationship Manager/ Regional Manager/ Business Head and recommends or approves on that email a. Sends to MD, if recommended b. Sends to Operations, if approved 6. MD approves or recommends and a. Sends to Operations, if approved b. Sends to Board Secretariat, if recommended for EC approval. 7. Operations forward the approved email (reply to all) and prepare documentation as per approval terms. 8. Board Secretariat prints the appraisal, takes sign of MD on the appraisal and circulates/ places before EC for approval and after approval informs Operations and all relevant parties.

3.6 Guidelines for Credit Appraisal and Product Policy Appraisal Issues: Acceptable business:


a)

Tenure of Business: The business must be a going concern with minimum 3 (three) years of operation. New ventures may be financed, if the concern has strong and proven group support.

b)

Location: The business should be located anywhere in Bangladesh having good communication and infrastructure facility.

c)

Nature of Business: Trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. located across the country.

d)

Legal Status of Business: Sole Proprietorship, Partnership, Private Limited Company and Public Limited Company. In case of CFF other than Public Limited Company.

e)

Management: In case of sole proprietorship and partnership business, the owner(s) must have full control over the business (actively involved in the day to day operation of the business).

f)

In case of private limited company, the Managing Director must have minimum 3 years of experience in the same line of business and have full control over the business.

g)

In case of collateral free loan Debt Service Coverage Ratio (DSCR): (Earning after taxes + Interest + Depreciation + Other non-cash expenses)/Total debt payment for the next year. Total debt payment for the next year should include installments payment from the proposed finance. The ratio should cover 120% of annual debt payments in general and for woman entrepreneur 150% of annual debt.

h)

Successor: Successor information is mandatory only if the proprietor / partners or authorized person of the concern aged over 55 years.

Acceptable Entrepreneur/ Owner: a) Nationality: Bangladeshi. b) Minimum age 30 years, maximum 55 years at the time of application can be relaxed up to 65 years if clear successor’s age is below 55 years. c) Tenure of residence: in case of medium enterprise borrower must reside at least 24 months in the same city and for small enterprise at least 24 months in the same address. d) Experience: The entrepreneur must have minimum 3 (three) years experience in the same line of business. e) Employment status: No government employee is eligible for loan. Employees of private organizations are eligible subject to submission of NOC form the employer.


Verification of personal details: The RM will attest the photographs of the entrepreneur(s)/owner(s) and guarantors as to the name and address by cross checking with the local people (respectable and reliable persons/offices of the locality). RM will also verify the signatures of the customer in the Loan Application and all other papers prepared by the entrepreneur/owner. CIB: a) Loan approval will be accorded subject to receipt of clean CIB report from Bangladesh Bank. Repeat loan will be evaluated as new one and as such CIB report will also be obtained for repeat loan and CIB report more than 3 (three) months antedated will not be acceptable. b) New CIB will be required in case where time difference between sanction date and disbursement request date exceeds three months. c) In case of woman entrepreneur, credit may require CIB undertaking of the spouse. d) Loan request from client having classified loan status will not be approved unless reported CIB appears as a fake statement subject to sufficient proof from the lending authority. e) Loan request from client having SMA status will be approved only if they clear the outstanding with sufficient proof from the lending authority and appropriate explanation of the delay in payments. f) Above

requirements

may

vary

time

to

time

following

Bangladesh

Bank

amendment/addition/correction of circulars in this regard.

Personal Guarantee: a) Personal guarantees of spouse/family members (proprietorship concern), partners (partnership concern), directors (private limited company). b) Third party personal guarantee is mandatory for collateral free loan facility. Also applicable for other facilities, if necessary. c) Corporate Guarantee (CG) of parent company is a must in case of new concern of a group. d) In case the business is owned by one person but operated/managed by other. The operating person will also furnish guarantee against the loan.


e) In case the land on which the business is located is owned/possesses by family member/s of the entrepreneur/owner, the family member will also furnish guarantee against the loan or lease agreement. Acceptable guarantor: a) Age: Minimum 30 years, Maximum 60 years less tenor of the loan but in case of family guarantor(s) this age limit is relax able. b) Net Worth: Minimum 125% of the loan amount but in case of family guarantor(s) this limit is relax able. c) Guarantor of one loan may furnish further guarantee if he/she has sufficient net worth i.e., 125% of all the loans against which guarantees are given but in case of family guarantor(s) this limit is relax able.

Collateral: Eligible security list mentioned below and as per security policy of the company a) Registered Mortgage of Land property. b) Full or partial cash coverage (in the form of readily deposits/fixed deposits in ULC or in other Bank/NBFI’s, if the entrepreneur(s)/owner(s) offers/agrees to offer). c) Hypothecation on the inventory, receivables, advance payments, plant & machinery d) Post dated cheques for each installment and one cheque covering full amount of lease rentals or loan installments. e) Title deed of land property of any value of the loan amount or possession deed of the shop/and factory/and go down. Documentation: Fees & Charges: For corporate and medium clients, ULC holds the right to decide on the maximum fees and charges depending on the client relation, business nature, number of times visit to the concern, distance from our office, finance amount etc. For small enterprise clients, maximum fees and charges will be according to documentation charge policy. Prepayment:


The client can prepay and adjust full or partial amount with the loan account only after adjustment of first six loan instalments. Inspection: a) Mortgaged lands or other provided securities are subject to inspection, pre as well as post approval. b) Before approval of the loan facility, the Relationship Manager must inspect the land or other provided securities. c) After approval and before disbursement the land will be inspected by an official from Operations department as per inspection policy of the company. d) The purpose of these inspections is to establish the fact that the land financed complies with specifications of the approved credit proposals. Authentication/Attestation/Signature Verification: The RM will attest the photographs of the entrepreneur(s)/owner(s) and guarantors as to the name and address by cross checking with the local people (respectable and reliable persons/offices of the locality). RM will verify the signatures of the customer in all the pages of the Loan Application Form and all other papers prepared by the entrepreneur/owner. Disbursement pre-condition: All the documentation formalities will be complied with. Fees stamp and other charges will be duly realized. Difference in name A declaration (halafnama) in Tk. 50.00 denominated non-judicial stamp will be obtained in case the name of the entrepreneur(s) / owner(s) and guarantors varies in various documents. Disbursement: Pre-condition: All the documentation formalities will be complied with fees; stamp and other charges will be duly realized. Disbursement mode:


ULC will issue the cheque in favor of the client for the loan amount through any scheduled bank. Required documents: In addition with following documents credit may require further documents, if necessary, for justification of any events; Client related document: client Specific

Proprietorship/partnership: 

Application for facility

Copy of updated trade license

Copy of updated tax return certificate.

Bio-data of the proprietor/partners

Copy of National ID of the proprietor/partners

Limited Company: 

Copy of Memorandum & Articles of Association of the company including Certificate of incorporation duly certified by RJSC and attested by the Managing Director accompanied by an up-to-date list of Directors in form XII and schedule X.

Copy of Updated Trade License

Copy of tax return certificate.

Bio-data of the main sponsors

Copy of National ID of the Directors

Copy of Board Resolution of the company for availing credit facilities from ULC and authorizing Managing Director/Chairman/Director for execution of documents and operation of the accounts

Credit information

Directors’ photo and signature card. CIB undertaking form duly signed by the proprietor/partners and directors.

Sanction letter of existing loan facilities obtained by the

proposed entity. Ownership of premises by Attested photocopy third party

of

Rent

Agreement/deed,

Lease

Agreement/deed, Possession deed, Title deed/ownership along


with updated khajna receipt, Power of Attorney (in case of Inconsistency

father's/other's land/shop /factory, where applicable) • Halafnama (Affidavit) regarding inconsistencies in the name of the entrepreneur/guarantor • Undertaking incase of differences in actual address with the registered address of trade license

Guarantor related documents Personal Guarantor

Corporate Guarantor

Net Worth Statement of the Guarantor.

Attested Photographs

Copy of National ID Card

Trade license of guarantors incase of business friend. Memorandum and Articles of Association of the

guarantor 

Audited/Management (only if audited accounts are not available) accounts for last three years duly signed by client to justify their net worth position.

Business related documents Financials

Audited/Management (only if audited accounts are not available) accounts for last three years duly signed by client.

Bank Statement of last 1 (one) year. Updated group liability position

Affiliated concerns

New business/BMRE Fixed asset/Inventory

Updated group financial position Financial Forecast for the next three years.  Fixed assets list & 

Export/import business Utility bill

Transport business

Updated stock report attested by the client and verified by

 

the relationship manager. Export/import license Up-to-date Rent Receipt

Up-to-date Electricity Bill

Up-to-date Telephone Bill

Up-to-date Gas Bill (In case of factory) Route permit from regional transport authority for


inter/intra city passenger transport business 

Fitness of buses/coaches from regional transport authority

Carrying contract with the customer

Registration of Vehicles, which are owned and operated by the lessee

Telecommunication business

 

Agricultural business

Advance tax deduction challans to verify the revenue of carrying contractors License from BTRC to operate. Work

order

for

auxiliary

telecom

services

(Telecommunication-Support) Permission to be obtained from Divisional Forest Officer,

Social

Forestry

Department

(Saw

Mill

Rule/Ordinance 1998) 

For trading of Pesticide permission need to be obtained from Plant Protection Specialist, Agricultural Extension Directorate.

License issued by Director/ Deputy Director, Directorate of Agricultural marketing; Bangladesh Agricultural produces

Health sector

market control act. 1964. Drug license is required for sell, stock, exhibit for sale, distribute drugs and distribute biological and other special products.

License

from

Health

Directorate

(for

private

pathology/diagnostic center) 

In case of transfer of drug license, obtain a sale deed in non-judicial stamp of Tk. 150.00 denomination executed by the transferor in favor of the Transferee in which the amount of sales price and date of sale will be mentioned. Also enclose the attested photocopy of the Drug License in which the name of the transferee is inserted by the Drug License

Petroleum Business

issuing authority with their signature. For petroleum business permission need to be obtained from the Explosive Inspector under Petroleum Act. 1934. (for petroleum)


Permission under the Gas Cylinder Bidhimala 1991 need



to be obtained for trading of gas filled cylinder. (Trading of gas filled cylinder) Under the Environment Conservation Act 1995, all



industrial projects shall obtain environmental clearance from the Department of Environment. The main criteria for obtaining clearance are set out in the Environment Conservation Rules 1997 which was established under the Act. Different levels of assessment are required depending Trading

of

gas

cylinder

on the particular industry concerned. filled Permission under the Gas Cylinder Bidhimala 1991 need to be obtained for trading of gas filled cylinder.

Collection Repayment method: Repayment can be done through post dated cheque, monthly cheque, standing instruction or even cash which is an exception depending on the nature of business. Late Payment Charges Late payment charges are charged on each instalment amount as stated on the agreement. Rescheduling Rescheduling of loans, advances and other assets require prior approval of EC/MD and in some specific cases from Bangladesh Bank. During rescheduling / declassification of the loan, Bangladesh Bank sets rules must be followed meticulously.

Rescheduling of Loans/ Advances Rescheduling of loans and advances means the restructuring of the rentals to match the changed covenants or the spreading out over a longer period for repayment than the term originally agreed of a debt. While considering loan rescheduling application, we required to follow under-mention guidelines:


a) For rescheduling of loans/advances we should examine the causes as to why the loan has become non-performing. If it is found that the borrower has diverted the funds or the borrower is a habitual loan defaulter, we should not consider rescheduling, instead, we should take legal steps for recovery of the loans. The reason for rescheduling should clearly be mentioned in the rescheduling proposal. b) While considering the loan rescheduling proposal we must assess the borrowers overall repayment capacities taking into account the borrower’s liability position with other FIs. c) If rescheduling is done for second time or more, then the cause of rescheduling should be clearly mentioned in the rescheduling proposal. Why not the account is closed and shifted to Block account should be clearly described. d) Officials will undertake on the spot inspection of the company/ business enterprise in order to assess whether the borrower will be able to generate surplus fund to repay the rescheduled liability. e) If we are satisfied that the borrower will be able to repay, the loan may be rescheduled. Otherwise, we should take all legal steps to realize the loan, make necessary provision and take measures to write-off. f) The rescheduling should be for a minimum reasonable period of time. g) At the time of placing the rescheduling proposal before the Executive Committee, we shall apprise the EC in detailed, what would be the implications of such loan rescheduling on the income and other areas. The loans which are repayable within a specific time period under a prescribed reschedule are treated as term loans. In terms of FID circular no. 02 dated March 05, 2007 of Bangladesh Bank, down payment at the following rates must be realized for rescheduling of the term loans: A. Rescheduling for the first time will be considered only after cash payment of at least 15% of the overdue installments or 10% of the total outstanding amount of loan, whichever is less; B. Rescheduling for the second time will be considered after cash payment of minimum 30% of the overdue installments or 20% of the total outstanding amount of loan, whichever is less C. Rescheduling for more than two times will be considered after cash payment of 50% of the overdue installments or 30% of the outstanding amount of loan, whichever is


less; Other Terms and Conditions of Rescheduling: a) Borrower whose loan has been rescheduled shall not get any new loan facility direct or indirect, in addition to the existing credit facility within a period of one year or until the loan is fully repaid which occurred first. b) For rescheduling as above no prior approval of Bangladesh Bank will be required: prior approval of Bangladesh Bank shall have to be obtained if the loan is related to the director(S) of a bank company or it is a large loan or has been classified by Bangladesh bank.

Overall Credit Risk Management in United Leasing Company: In Bangladesh, Credit Risk accounts for more than 50% of the aggregate risk elements that an FI must assess. Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations. Credit Risk Management (CRM) is a holistic system. The system involves five major steps, namely, identification, measurement, matching, monitoring and controlling credit risk exposures. The CRM policies of ULC are in compliance with the guidelines set by the central bank, Bangladesh Bank. The CRM policies regarding which facilities or borrowers can be approved for a loan are given below: The general guidelines for CRM in ULC include the Appraisal issues, Documentation procedures, Disbursement procedures, the required documents, the collection and the rescheduling of loans procedures in ULC. A brief of the guidelines are given below: Some basic criteria determine the loan acceptance for businesses. The tenure of the business must be at least 3 years at a location within Bangladesh with good communication infrastructure. The nature of the business should be Trading, manufacturing, service, agriculture, non-farm activities, agro-based industries. The legal status of the business should be that of Sole Proprietorship, Partnership, Private Limited Company and Public Limited Company. The owner(s) should have the control over the operations of the business. In case of a private company, the MD should have at least 3 years of experience in the same line of


business. If the proprietor is over 55 years of age, it is mandatory to give successor information. In ULC, an acceptable entrepreneur/owner must be Bangladeshi with a minimum age of 30 years and a maximum of 55 years which can be relaxed up to 65 years depending on the age of the clear successor. In case of medium enterprise borrower must reside at least 24 months in the same city and for small enterprise at least 24 months in the same address. The entrepreneur must have minimum 3 years’ experience in the same line of business. And no government employee is eligible for the loan. The RM is to verify the personal details of the borrower by attesting the photographs of the entrepreneur/owner and guarantors as to the name and address by cross checking with the local people. Loan approval will be accorded subject to receipt of clean CIB report from Bangladesh Bank. Repeat loan will be evaluated as new one and as such CIB report will also be obtained for repeat loan. In case of woman entrepreneur, credit may require CIB undertaking of the spouse. Personal guarantees of spouse/family members (proprietorship concern), partners (partnership concern), and directors (private limited company) is required. Third party personal guarantee is mandatory for collateral free loan facility. This is also applicable for other facilities, if necessary. The age of an acceptable guarantor is minimum 30 and maximum 60 years of age and the net worth of the guarantee is 125% of the loan amount. But, both of these can be relaxed in case of family guarantor(s). Among acceptable collateral are, registered mortgage of land property, full or partial cash coverage, hypothecation on the inventory, receivables, advance payments, plant & machinery, postdated cheques for each installment and one cheque covering full amount of lease rentals or loan installments, title deed of land property of any value of the loan amount or possession deed of the shop/and factory/and go down. In case of documentation procedures, ULC holds the right to decide on the maximum fees and charges depending on the client relation, business nature, number of times visit to the concern, distance from their office, finance amount etc. in case of corporate of medium clients. For small enterprise clients, maximum fees and charges will be according to documentation charge policy. The borrower can adjust full or partial amount only after paying six instalments. It is the duty of the RM for pre and even post approval inspection of the mortgaged lands or other securities. The verification will also be done by the RM.


The disbursement mode is cheque in favour of the client for the loan amount through any scheduled bank. Repayment can be done through post-dated cheque, monthly cheque, standing instruction or even cash which is an exception depending on the nature of business. The procedures of rescheduling of loans are also described in the general guidelines. PPG Lease: Leasing takes several different forms, the 2 (two) most important being (i) financial lease and (ii) operating lease. Financial leases, sometimes called ‘capital lease’ or ‘full pay out lease’, here the lessee is responsible for all maintenance and repairs to the asset(s). In addition, lessor gets back full cost of the asset(s) plus a return on invested capital. Under operating lease, lessor retains the title of the asset(s) and also responsibility for maintaining the asset(s). The obligations of the lessee are limited to the payment of rentals and the return of the asset(s) at the end of lease period. In ULC, only ‘financial lease’ is offered and can be categorized on the basis of the asset procurement process. The three different type of financial lease are: •

Local Purchase

Foreign Purchase

Sale and Lease back

Local Purchase: In this type of purchase, ULC procure the asset(s) according to client’s choice from the local vendor and lease the asset(s) to the client. Procurement process of local purchase: a ‘quotation’, in ULC’s name, will be forwarded to them and an agreement will take place between ULC and client. ULC will issue a ‘purchase order’, following that goods will be transferred to client’s premises. Upon receipt of ‘delivery challan’ and ‘bill’ in ULC’s name, a cheque will be issued to the vendor by ULC. Foreign Purchase: In a foreign purchase, ULC procure the asset(s) according to client’s choice from the foreign vendor and lease the asset(s) to the client.


Procurement process of Foreign Purchase: A ‘pro-forma invoice’ (accepted by client), in ULC’s name, will be forwarded to them and an agreement will take place between ULC and client. ULC will open LC through bank and perform advance payments to the bank as per their request. Upon LC retirement and receipt of shipping documents, client will pay the IDCP charges to ULC and the disbursement will be executed. Sale and Lease back: This is a special type of finance lease; here asset(s) is procured by the client from a local or foreign vendor. Client then sells the asset(s) to ULC and simultaneously executes an agreement to lease the asset(s) back for a stated period. Procurement process of Sales and Lease back: a special type of finance lease, here asset(s) is procured by the client from a local or foreign vendor. Client then sells the asset(s) to ULC and simultaneously executes an agreement to lease the asset(s) back for a stated period.

Figure 1 Types of lease There are some basic Negotiation and Pre-appraisal issues in the PPG of Lease. There is a finance limit set in this guideline. The minimum finance amount is Tk. 1 lac and the maximum finance amount for a new client preferably up to 80% of the market price of asset(s). However, in case of existing client, maximum finance can be up to 100% of the market price of asset(s), depending on the client’s track record with ULC and condition of the asset(s). ULC holds the right to decide on the maximum finance amount to be provided.


The Asset Types which are acceptable for a financial lease are stated in the guideline. Facility is provided to lease of any type of equipment, machinery, vehicles or other capital assets which has an acceptable resale value and must not be perishable. Moreover economic life of the asset(s) must be greater than the finance period. Financing of reconditioned vehicle, not more than 5 (five) years old, is allowed but ULC does not encourage the finance of any used vehicle(s). The Lease Tenure ranges from 12 months to 60 months depending on the asset(s) condition, usage and economic life. Repayment of the lease facility is made through equated monthly installments, comprising of principal and interest either in advance or in arrear mode. However, quarterly installment or structured payments can be designed if the client’s cash flow does not allow for monthly equated payments. The price / interest rate of a lease facility is determined by the true cost of the fund plus risk premium for the ULC’s assessment and acceptance of risk. For security, during the entire tenure of the facility, ULC will hold the ownership of the asset(s) and can liquidate to cover the loss, in case of default. Additional security might be required, if the resale value of the proposed asset(s) is not sufficient to cover the exposure at risk. At the end of lease tenure, the lessee holds the right to transfer the ownership of the asset(s) under his/her name upon payment of a minimum consideration, known as transfer price. However, ULC holds the right to decide upon the minimum transfer price to be charged on the client. The need and tenure of a moratorium period for a credit facility will be determined on the basis of the total finance amount, the type and condition of business and relationship with the borrower. Generally the moratorium period will range from 1 month to 6 months and will be applicable only for concerns undertaking BMRE (Balancing, Modernization, Replacement and Expansion) or any Line expansion project. There are provisions for prepayment. The client can prepay and adjust full or partial amount of the lease facility only after adjustment of first 6 (six) rentals. ULC will charge 2% on the net outstanding amount as early settlement fee plus VAT. Exposure limits have been set based on the asset size of the client and proportion of the exposure to ULC’s equity. Total financial commitment to any single enterprise will not normally exceed 50% of the long term assets of that enterprise. Total outstanding financial


commitments to any single enterprise will not normally exceed an amount equivalent to 10% of the ULC’s equity. In addition, total outstanding financial commitments to any group of enterprises will not normally exceed an amount equivalent to 15% of the ULC’s equity. Asset Verification is done by the RM. In case of new asset(s) to be leased, ULC will physically verify the asset(s) at any time. On the other hand, in case of old asset(s) to be leased, verification will be done and the report has to be forwarded to credit before approval. Any deviation to the guideline has to be approved by the management. PPG Loan: Loan facility is designed for the longer term as well as shorter term business purposes, where main theme is to support clients to meet up their expansion objectives and working capital requirement. Loan facilities at ULC can be categorized under 2 (two) broad heads; collateral backed loan and collateral free loan. Collateral Backed loan: Facility which is completely or 100% secured by the collateral. Products offered under this facility are as follows: •

Long term loan

Short Term loan

Revolving loan

Long term loan, facility is applicable for business expansion where the client will not be able to generate enough cash flow to repay the debt within a year. Short-term loan, facility is applicable for working capital purposes, where the investment requirements are specific and for shorter period. Revolving loan, facility is provided to meet up continuous working capital requirement in a year. A limit is provided to the client depending on business type and requirement. Client can utilize whatever the amount necessary within the limit. Collateral free loan:


Facility which is not secured by collateral only enjoys personal guarantee from third party as security. Products offered under this facility are as follows: •

Nokshi

•

Agrani

•

Mousumee

Nokshi is a business loan scheme for women entrepreneurs, at a modest rate, for the purpose of working capital finance to the small and medium sized enterprises. Agrani is a business loan scheme for the purpose of working capital finance to the small and medium sized enterprises. Mousumee is also a scheme for working capital finance to the small and medium sized agrobased

manufacturing

industries

(agricultural

equipment

and

spare

parts).

Figure 2 Types of loan There are some negotiation and pre-appraisal issues here too. The minimum loan amount for new and existing client is Tk. 1 lac. ULC holds the right to decide on the maximum loan amount to be provided. Loan limits are as follows:


Figure 3 Loan limit In case of collateral free facility, existing client/s will be subject to new loan limit, only when the concern has a proven track record of repayment of earlier loan facility and growth of the business is justifiable. There are some determinants of loan amount. In case of project finance, loan amount has to be 70% of the project cost (estimated).In case of collateral free facility; maximum loan ceiling defined in this guideline or 75% of the sum total of inventory and receivables of the last year whichever is lower. In case of working capital finance, maximum up to 100% of the net required working capital or 75% of the sum total of inventory and receivables, whichever is lower? For Security purposes, Loan facility, other than collateral free facility, has to be fully secured. In case of Collateral free facility, adequate personal guarantee (minimum net worth has to be 125% of the loan amount) is required. Exposure limits have been set based on the asset size of the client and proportion of the exposure to ULC’s equity. Total financial commitment to any single enterprise will not normally exceed 50% of the assets of that enterprise. Total outstanding financial commitments to any single enterprise will not normally exceed an amount equivalent to 10% of the ULC’s equity. In addition, total outstanding financial commitments to any group of enterprises will not normally exceed an amount equivalent to 15% of the ULC’s equity. Loan tenure in case of term loan facility (collateral backed loan) is 12 - 60 months, short term loan facility is 6 – 12 months, revolving loan facility is 12 months and collateral free facility is preferably for 12 months but maximum allowable tenure is 18 months only. In case of revolving loan facility, disbursement will be made according to client’s requirement. Maximum drawdown at any point of time will not exceed sanctioned amount and draw down interval will depend on average period gap of purchase of raw material for the last 6 (six) months.


Repayments of the loan facility are made through equated monthly installments, comprising of principal and interest either in advance or in arrear mode. Under special circumstances, quarterly installment or structured payments can be designed if the client’s cash flow does not match with equated payments. The price/interest rate of a loan is determined by the true cost of the loan plus risk premium for the ULC’s assessment and acceptance of risk. In case of collateral free products minimum effective rate will be as follows: Collateral Free Facility

Minimum Effective Rate

Nokshi

10%

Agrani

18%

Mousumee

18%

Figure 4: Minimum Effective Rate There are provisions for prepayment. The client can prepay and adjust full or partial amount of the term loan facility only after adjustment of first 6 (six) loan instalments and in case of collateral free facility may be allowed at any point of time. Prepayment premium will be set on the offered interest rate less 3%. The need and tenure of a moratorium period for a credit facility will be determined on the basis of the total finance amount, the type and condition of business and relationship with the borrower. Generally the moratorium period will range from 1 month to 6 months and will be applicable only for concerns undertaking BMRE (Balancing, Modernization, Replacement and Expansion) or any Line expansion project. ULC holds the right to decide on the maximum Moratorium period to be provided depending on the client relation and business nature. Repeat Loans can be given. In case of loan, repeat loan may be allowed after 12 months timely repayment of the instalments. In case of collateral free facility, it may be allowed after 60% timely repayment of the installments. Any deviation has to be approved by the management.


Risk Measurement: At this level, ULC uses Borrower Risk Grading and Facility Risk Grading. Certain standards have been set by ULC which is basically overseen by a RM. The criteria on which a borrower is judged are nationality, age, residence, experience, employment status. The criteria for grading Facility are Tenure of business, location of business, nature, legal status, management and successor plans of the business. A RM is assigned for the physical verification of the facilities and also the paperwork of the business. Acceptable Business: •

The business must be a going concern with minimum 3 (three) years of operation. New ventures may be financed, if the concern has strong and proven group support.

The business should be located anywhere in Bangladesh having good communication and infrastructure facility.

Trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. located across the country.

Sole Proprietorship, Partnership, Private Limited Company and Public Limited Company can be allowed.

In case of sole proprietorship and partnership business, the owner(s) must have full control over the business (actively involved in the day to day operation of the business).

In case of private limited company, the Managing Director must have minimum 3 years of experience in the same line of business and have full control over the business.

In case of collateral free loan Debt Service Coverage Ratio (DSCR): (Earning after taxes + Interest + Depreciation + Other non-cash expenses)/Total debt payment for the next year. Total debt payment for the next year should include installments payment from the proposed finance. The ratio should cover 120% of annual debt payments in general and for woman entrepreneur 150% of annual debt.

Successor information is mandatory only if the proprietor / partners or authorized person of the concern aged over 55 years.

Acceptable Borrower: •

The owner/borrower must be a Bangladeshi.


Minimum age should be 30 years; maximum 55 years at the time of application can be relaxed up to 65 years if clear successor’s age is below 55 years.

In case of medium enterprise borrower must reside at least 24 months in the same city and for small enterprise at least 24 months in the same address.

The entrepreneur must have minimum 3 (three) years’ experience in the same line of business.

No government employee is eligible for loan. Employees of private organizations are eligible subject to submission of NOC from the employer.

The CRM policies of CRM are rather detailed in case of identifying the Credit Risk. Loan approval will be accorded after receiving clean CIB report from Bangladesh Bank. Repeat loan will be evaluated as new one and as such CIB report will also be obtained for repeat loan. In case of woman entrepreneur, credit may require CIB undertaking of the spouse. Personal guarantees of spouse/family members (proprietorship concern), partners (partnership concern), and directors (private limited company) is required. Third party personal guarantee must be provided for collateral free loan facility. This is also applicable for other facilities, if necessary. The age of an acceptable guarantor is minimum 30 and maximum 60 years of age and the net worth of the guarantee is 125% of the loan amount. But, both of these can be relaxed in case of family guarantor(s). Among acceptable collateral are, registered mortgage of land property, full or partial cash coverage, hypothecation on the inventory, receivables, advance payments, plant & machinery, postdated cheques for each installment and one cheque covering full amount of lease rentals or loan installments, title deed of land property of any value of the loan amount or possession deed of the shop/and factory/and go down. In case of documentation procedures, ULC holds the right to decide on the maximum fees and charges depending on the client relation, business nature, number of times visit to the concern, distance from their office, finance amount etc. in case of corporate of medium clients. For small enterprise clients, maximum fees and charges will be according to documentation charge policy. The borrower can adjust full or partial amount only after paying six instalments. It is the duty of the RM for pre and even post approval inspection of the mortgaged lands or other securities. The verification will also be done by the RM.


The disbursement mode is cheque in favour of the client for the loan amount through any scheduled bank. Repayment can be done through post-dated cheque, monthly cheque, standing instruction or even cash which is an exception depending on the nature of business. The procedures of rescheduling of loans are also described in the general guidelines.

Analysis of the Credit Risk Management System in ULC The CRM activities can be classified into five main functions, they are, Risk Identification, Risk Measurement, Matching Mitigations, Monitoring and Control of Credit Risk Exposures. In this section, I will analyze these functions performed by ULC in context with the best practices and the guidelines. Risk Identification: The risk identification of the CRM in ULC is done by one of the three risk managements in the company. It is done by Risk Management 1. The department tries to mitigate future risk of investment exposure by analyzing the current market situation, analyzing client’s market specific and business specific risks. The department also applies various risk assessment analysis and appropriate risk management tools in order to assess and find the level of clients’ exposure to different types of risk, vulnerability of the client to various businesses specific and market specific risk and client’s capability to successfully withstand those kinds of risks. The three tools to identify risks in ULC are, Industry analysis and scoring, Industry benchmarking and Risk Review Matrix. These are mainly carried out by the Markets department of Risk Management 1. Industry Analysis is a marketing tool used to analyze several aspects of the industry to determine if the company can make a profit in the market. Analyzing economic factors, supply and demand, competitors, future conditions and government regulations help management decide whether to enter an industry or invest money elsewhere. Markets department prepare the Industry Analysis for different industries. This department also assigns an Industry Score on different industries depending on the factors mentioned before. Industry Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Industry


benchmarking process is now under construction under the markets department of the company. Markets department uses Risk Review Matrix as a tool in the risk assessment process. The company management concludes about the risk of financing a firm from RRM 1. The department finds different information under different categories which is important and influential in the financing decisions and assigns weight to them according to their importance. The point that the individual firm gets under each category is multiplied by the weight assigned to it. The total risk is the sum of the individual risks.

Credit Risk Grading Credit Risk Grading is an important tool for credit risk management as it helps a Bank to understand various dimensions of risk involved in different credit transactions. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as postsanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the pricing for a particular exposure, what should be the extent of exposure, what should be the appropriate credit facility and the various risk mitigation tools. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading and other precautions to be taken.

DEFINITION OF CREDIT RISK GRADING (CRG): •

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

•

A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.

•

Credit Risk Grading is the basic module for developing a Credit Risk Management system.

1


FUNCTIONS OF CREDIT RISK GRADING Informed decision making is monitored by well managed credit risk grading system. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns USE OF CREDIT RISK GRADING •

The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of an individual obligor and the credit portfolio as a whole.

As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit spread) and specific features of the credit facility.

Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile. It is also relevant for portfolio level analysis.

CRG Scale of Bangladesh Bank: Bangladesh Bank proposed an 8 grade scale for the banks to follow. However, the rating scale may differ from institution to institution. The grading scale is as follow:

Factors to Grade a

company: There are few factors which are to be considered while grading a company. Qualitative Factors: •

Management status

Regulatory Environment & Compliance

Risk Management

Sensitivity to Market Risk

Ownership (Share holding pattern) & Corporate Governance


Accounting Quality

Franchise Value

Quantitative Factors: •

Capital Adequacy

Asset Quality

Earnings Quality

Liquidity

Size of the Bank & Market Presence

Credit Risk Grading in ULC: The credit risk grading in ULC is done with two basic scales. ULC uses Borrower Risk Grading and Facility Risk Grading. The grading is given on the basis of the criteria that are discussed above. The grading is done on some criteria given on a Financing Proposal. The criteria are: •

Client

Purpose of the proposed facility

Proposed facility

Background of the company

Credit Investigation

Business & Market

Impact of finance

Financial Data and Key Indicators


When all these factors are considered, the Proposal is given a Facility Risk Grade and a Borrower Risk Grade. On the basis of those two grades, a Combined Risk Grade is given to the Proposal. For a complete picture of the holistic Credit Risk Grading at ULC, please refer to Annex-1 and Annex-2.

Annexure: Financing Proposal Annexure 1: X Furniture Limited (XFL) I.

Client:

The client is Company X which is a furniture manufacturing company. The relationship of the client with ULC is from July 2002. The business is located at Dhaka. II.

Purpose of the Proposed Activity:

X is one of the biggest furniture manufacturers in Bangladesh. Besides having 5 (five) showrooms at different exclusive locations of Dhaka city, they have showrooms in Narayangonj, Bogra, Sylhet and Chittagong. They manufacture quality furniture from wellseasoned local woods to serve the high income group of the country. The company has constructed a modern six storied building in Dhaka for another showroom come corporate office which has been inaugurated in July 2010. The company has plans to shift their factory to Fordnagar, Savar. They will establish production line for office furniture, and knock down furniture along with the existing production facilities. The total project cost has been estimated at Tk. 500 million. The first phase of the construction has begun. It will be 40,000 sq. feet pre-fabricated steel building which will need an estimated cost of Tk. 49.46 million. The proposed finance will be utilized to meet a portion of this project cost. The required finance stands at Tk. 25,000,000. III. Proposed Facility: It is a term loan type of facility. The loan amount is Tk. 25,000,000 and the loan period is 48 months. The interest rate is 15.50% whereas the pre-tax IRR is 16.24%. The installment amount is Tk. 702,121 in arrear and will be in equated monthly installment. The loan advance


is Tk. 702,121. The Early Settlement fee is 2% of principal outstanding with VAT. The IDCP is 15.50% per annum. And the penalty interest is 20.00%. The documentation fee is Tk 5,000 with a VAT of Tk 750. The documentation cost reimbursement and Advance Insurance stays at 0. The Upfront fee is Tk. 10,000 with a VAT of Tk 1,500. No Supervision fee is applicable in this case. The legal fees are considered at actual with VAT. The Grace period stands at 0 (zero) months. The Previous Net Highest Group Exposure was Tk. 83,264,783 as on 8 th June, 2008. The Net Current Group Exposure is calculated at Tk 36,570,689 with the Term Loan. The Net Proposed Group Exposure is Tk 100,868,567 with Term Loan and factoring. It includes a proposed factoring facility of Tk. 40 million for JAT Holdings Bangladesh Pvt. Limited. The method of repayment will be post-dated cheques. The Securities offered are as follows: •

Registered mortgage on 93.25 decimal lands located at Fordnagar, Singair, and Manikgonj. Market value of the land has been estimated as Tk. 18,650,000 at a rate of Tk. 200,000 per decimal estimated by the operation department of ULC.

Registered re-mortgage on existing 119.25 decimal lands located at Fordnagar, Singair, and Manikgonj. Market value of the land has been estimated as Tk. 23,850,000 at a rate of Tk. 200,000 per decimal estimated by the Operation department of ULC.

The personal guarantee of all the directors of the concern.

The client has provided additional mortgage of 4.95 decimal lands at Bhatara Mouja, Badda, Dhaka, as security against their previous agreement. The market value of the land is approximately Tk. 13,500,000.

Background Company: The company is located at Baridhara, Dhaka -1212 which is also the address of the factory. It is a private limited company. The company was incorporated/registered in 1992. The business commence in 1976 as a Manufacturing business. Company X has been engaged in manufacturing and marketing of various types of wooden furniture. Along with manufacturing, the company is also engaged in interior decorating and designing. The


company began as a proprietorship concern in 1976 and then incorporated as a private limited company in 1992.The factory of X is located on a 123 decimal land with a shaded area of 72,000 square feet in Baridhara. For finishing, lacquered finishing, foam work and glass work, the company has a separate factory shed of 5,000 sq. feet adjacent to its main factory building. The factory has more than 1,000 employees. The most important raw material of the company is Timber. These timbers are either local, from Chittagong, or bought from Burma. Items like MDF Boards and finishing materials are imported from countries like China, Malaysia and Singapore. They procure other raw materials locally. X mainly caters to the needs of the Upper and Upper Middle class of the country. Their products are priced at a higher level than that of the industry. They sell their products through the 5 (five) showrooms in Dhaka and the showrooms in Narayangonj, Bogra, Sylhet and Chittagong. The concern has planned to shift their factory to Fordnagar, Singair, and Manikgonj. 60 bighas of land has already been purchased and developed in the location. They have started to setup a 40,000 sq. ft. pre-fabricated steel building for the furniture manufacturing unit. Later, they will build facilities for the other sister concerns, namely X Foam and X Mattresses. They will have their own power source of 1MW with two diesel generators of 500 KVA each. The estimated cost of construction stands at 49.46 million. X Foam and X Mattresses are two sister concerns of XFL which are involved in the manufacturing and marketing of foams and mattress respectively. They commenced their business on 2009. Both the products are marketed in the local market under the brand name of “X�. JAT Holdings Pvt. Limited is a joint venture of the main sponsor of XFL and JAT Holdings Ltd, a Sri Lankan company. They have been importing and marketing wood coating since 2009. They are now the only distributor of Arch Sayerlack Coatings (Italy), Polycure (Malaysia) and J Chem Coatings (Sri Lanka) in Bangladesh. Recently, they have initiated a joint venture with a Thai company named Thai Bangla Tools Ltd. which will be engaged in manufacturing various furniture accessories. The concern is expected to start operations by the end of 2011. Doors and Furniture are the current products of FL.


Sponsors: The major sponsor is Mr. A, aged 59. He has 90% of the shareholding in XFL and holds the designation of Managing Director. The rest 10% is held by his wife. Credit Investigation: The CIB of AFL as on 13.03.2011 is standard. Jamuna Bank, Mohakhali Branch, Dhaka is the banker of the company. The company has three creditors, BK-1, BK-2 and ULC. XFL has Tk 67.30 million in hypo loans in compared to the limit of Tk. 70 million from BK-1. Amount outstanding in LTR is Tk. 26.60 million (Limit is Tk 30 million) from BK-1. XFL has a term loan of Tk 178.20 million from Bk-1 with a limit of Tk. 205 million. Other Dir. Loans amount to outstanding amount of Tk. 25.40 million, which is also from Bk-1. From Bk-2, the company has a Term Loan of Tk 83.70 million outstanding. From ULC, the company has a term loan outstanding worth Tk 37.69 million. The limit in this loan is Tk. 42 million. All the numbers of Bk1 and Bk-2 are as of 31-Dec-2010 and the numbers of ULC are as of 3-Apr-2011. XFL maintained a regular repayment track with ULC. Business & Market: The market area of XFL is Dhaka, Narayongonj, Bogra, Sylhet and Chittagong. It is now one of the top manufacturers of wooden furniture in the country. The major clients of XFL include American Embassy, Indonesian Embassy, British Embassy, Saudi Embassy, Sharif Melamine and people of high income group. XFL also generates significant amount of revenue from local and international trade fairs. The plant is at Baridhara. It has its own storage facility of 2,000 sq. ft. area. The company has Yearly revenue of 685.02 million taka. And it has a yearly net profit of 88.14 million taka. That is, XFL is one of the biggest players in the industry. Impact of Finance: The finance will generate no additional employment in the company. But, it will help the concern to establish their newly proposed factory. Their new factory will increase their production capacity that will allow them to increase their revenue and profitability in the future. The proposed finance will have some environmental impact as it will be used by a wooden furniture manufacturing concern and will result in deforestation to some extent.


Financial Data & Key Indicators: If we look at the financial data and key indicators of XFL, we will see that it has quite a stable growth. All the numbers are given in Thousand Taka. From 427,550 in 2008, the Gross Sales/Revenue of XFL moved to 505,575 in 2009 resulting in a change of 18.25%. The increase has been more in 2010 when it had sales of 685,020 with an increase of 35.49%. The gross profit of XFL was 192,505 in 2008 and 230,520 in 2009. In 2010, the gross profit increased by 39.76% and rose to 322,170. The net profit also increased 20.56% in 2010 and became 88,139. In 2008 and 2009, it was 60,814 and 73,106 respectively. The Gross Fixed Assets of the company in 2010 was 697,586 compared to 501,802 in 2009 and 408,920 in 2008. The increase in 2010 was 39.02%. Total Current Assets of the company in 2010 was 204,426 compared to 173,875 in 2009 and 143,146 in 2008. The increase in 2010 was 17.57%. The Total Assets of XFL was 541,414 in 2008 and 664,617 in 2009. In 2010, the Total Assets increased by 33.69% and rose to 888,533. The Net worth of XFL changed from 335,832 in 2008 to 429,490 in 2009. In 2010, the company saw a stable growth of 23.10% in Net Worth and reached 528,689. The company had 69,825 in total Current Liabilities. In 2009, it was 63,105 and in 2010, it was 76,844. The total long term debt of the company in 2008 was 135,757, in 2009 it was 172,022 and in 2010, it was 283,000. Considering these factors, it can be said that XFL is enjoying quite a stable growth in recent years in an industry with few major players. Risk Assessment: The facility gets a 3 in the grading scale of ULC which denotes it as an average facility. It is a standard facility. And the coverage from the Asset/Collateral/Cash Security is Average. In


case of Default, the Security loss will be Tk. 2,245,439 in this finance and a cumulative loss of Tk 44,868,567. In the borrower grading scale, the size of the borrower is determined as a Medium Manufacturing borrower. The grade given is 3 which is an Acceptable borrower. These borrowers are deemed not as strong as Good Grade borrowers. But, still, they demonstrate consistent earnings, cash flow certainty and have a good track record. They also have adequate liquidity, cash flow and earnings. Credit in this grade would normally be secured by acceptable collateral. The combined risk grade given is 4 which denote an acceptable borrower with average standard of security coverage. Justification for recommendation: The facility was recommended for approval based on the numbers produce by the company. The company had a very good revenue and net profit. It also had an excellent payment track record with ULC as well as other creditors. The main sponsor of the company is very experienced personnel in the industry. XFL also had a very high net worth.

Sugar Industries Limited Client: The client is Y Sugar Industries Limited. It is a concern of the City Group. The relationship of the client with ULC is from May 2004. The business is located at Narayangonj. Purpose of the Proposed Activity: The proposed facility includes Capital Machinery for Sugar Refinery. 1 lot of DCS System, field instruments, control valves and accessories and 1 lot of Electrical supplies and accessories are included in these machineries. The price is $3,500,000 and a total cost of Tk. 252,000,000.The conversion rate has been considered $1=Tk. 72. The concern has already procured the proposed equipment from foreign vendor Sutech Engineering Co. Ltd, Thailand through the L/C facility of IFIC Bank Limited. Disbursement of the finance amount will be done directly to the client to pay off the short term facility availed for retiring L/C.


The expansion unit of the concern is under construction to enhance the refining capacity from 2,000 MT per day to 5,000 MT per day. The refinery will help the concern to establish distributed computerized system (DCS) for this new plant. This system will facilitate the concern to control and monitor the whole refining process of the plant. The total cost will be Tk. 243,635,000. And the required finance from ULC is Tk. 200,000,000. Proposed Facility: It is a lease type of facility. The finance amount is Tk. 200,000,000 and the lease period is 36 months. The client’s participation will be Tk. 43,635,000 in the facility. The interest rate is 14% and the pre-tax IRR is also 14%. This interest rate will be reviewed half yearly. The rental will be structured. The lease advance is Tk.0. The Early Settlement fee is 2% of principal outstanding with VAT. The documentation fee is Tk 4,000 with a VAT of Tk 600. The documentation cost reimbursement and Advance Insurance Premium stays at 0. The transfer price/Residual value is Tk. 1,000. And the total lease rental will be Tk. 243,166,667. The annual rent is also structured. The legal fee is Tk. 0. The Previous Net Highest Group Exposure was Tk. 205,894,734 as on 5 th February, 2006. The Net Current Group Exposure is calculated at Tk 0. The Net Proposed Group Exposure is Tk 200,000,000 with Lease. The method of repayment will be monthly cheques. The Security offered for this finance is personal guarantee of Mr. M, Managing Director of the concern. Background Company: The company is located in Dhaka. And the address of the factory is at Rupgonj, Narayangonj. It is a private limited company. The company was incorporated/registered in 2004. The business commence in January, 2006 as a Manufacturing business. YSIL is involved in refining raw sugar to fine sugar since its inception in 2006. Their factory in Rupgonj is located in one of their industrial parks which are about 100 acre in area. They started the refinery with a capacity to refine 1,200 MT sugar per day through the technical collaboration of Sutech Engineering Co. Ltd, Thailand and machinery from Fives Cail, France. They have increased their capacity to 2,000 MT per day. The refinery now has 90% efficiency. The existing factory premise of the concern is under around 38,400 sq. ft. six-


storied factory shed. The warehouse is around 67,250 sq. ft. in area. The factory requires 4.5 MW electricity supplied by own duel fuel based 11MW power plant. The main raw material for the refining process is raw sugar which is imported from Brazil and Thailand. The raw materials reach factory through inland water vessels. Raw sugar is taken to warehouse using conveyor belt. Lime is also used in the process to reduce color in different stages. Raw sugar is carried to the processing plant through underground pipeline. Through different stages, the raw materials turn into remelted liquor, carbonated liquor, brown liquor and fine liquor respectively. This fine liquor is dried and cooled and it becomes fine sugar. The only by-product is molasses. They sell 90% of the total production in the wholesale market in 50 kg bag and rest in 2 kg, 1 kg and 0.5 kg bag through group distribution channel. All the products are marketed under brand name of “T”. YSIL is one of the sister concerns of the Y Group, one of the largest conglomerates of Bangladesh focused in mainly edible oil, refined sugar and different staples. This group was established in 1969 through retail trading of edible oil. In 1972, the first manufacturing concern, Y Oil Mills, a mustard oil production unit was established. All products are marketed under the brand name of “T”, “S”, “N” and “J”. They now have a diversified business portfolio. In 2004, they procured a tank terminal in Chittagong for storing crude edible oil under the name of Van Ommeren Tank Terminal (VOTT) Bangladesh Ltd. The expansion plan will increase the rated capacity of the refinery from 2,000 MT to 5,000 MT. The expansion unit is already under construction. There will be a 43,836 sq. ft. and 73,975 sq. ft. pre-fabricated shed dedicated to main processing plant and warehouse of the expansion unit respectively. All the machinery has already been imported and installed. Wiring and piping are yet to be completed. Sutech Engineering Co. Ltd, Thailand has been appointed as the supplier and technical consultant for this project. They are expecting the construction to be completed within the next three (3) months. Proposed facility will require 7MW electricity. The group plans to procure duel fuel based generator to enhance the capacity of the current power plant to 25MW. Their only product is refined sugar. Sponsors: The major sponsor is Mr. F, aged 60. His home district is Dhaka. He has 70% of the shareholding in YSIL and holds the designation of Managing Director. His level of education


is B.A. H is the second shareholder of the company. Aged 47, she is the wife of the major sponsor. She also hails from Dhaka and owns 30% of the shareholding of the company. She is the Director of YSIL. Mr. R, Chairman of the group, initiated it in 1969. He is one of the directors of Jamuna Bank Limited and Dhaka Insurance Limited. Credit Investigation: The CIB of YSIL as on 08.03.2011 is Standard and SMA of the company. IFIC Bank, Federation Branch, Dhaka is the banker of the company. The company has at present different loan amounts outstanding with 16 Banks and 1 Financial Institution. The amount outstanding is worth Tk. 5,532.10 million. Whereas, the limit on the loans is Tk. 5,026.80 million. The Non-funded amount outstanding of the company is Tk 1,072.40 million compared to the limit of Tk. 257.70 million. The funded amounts include Short term finance and Long Term Loan. The Short Term finance amount outstanding is worth Tk. 2,955.50 million and the limit is Tk. 2,788.10. The Long Term Loan amount outstanding is worth Tk. 1,504.20 million and the limit is Tk. 1,981 million. YSIL maintained a regular repayment track with ULC in their previous contracts. They do not have any current exposure with ULC.

Business & Market: The market area of YSIL is all over Bangladesh. It is now one of the top manufacturers of refined sugar in the country. Bangladesh has a demand of 1.4 million MT of sugar annually. YSIL is refining around 0.63 million MT sugar per year, almost 45% of the total country demand. State owned sugar mills produce around 9% of the demand; the rest is met by other local refineries and import. The major clients of YSIL are general public of Bangladesh and the wholesalers of refined sugar. The plant is at Rupgonj, Narayangonj. The proposed facility will be located in the same location. It has its own storage facility of 67,250 sq. ft. area. The company has Yearly revenue of 15,106.90 million taka. And it has a yearly net profit of 767.19 million taka. That is, YSIL is the biggest player in the industry.


Impact of Finance: The finance will generate no additional employment in the company. But, it will help the concern to monitor and control the whole production process of the proposed expansion unit. Successful implementation of the project will result in the generation of Tk. 38,400 million of additional sales revenue I the first year considering 80% utilization of the rated capacity, price of Tk 50,000 per metric ton and 320 days operation in the year. The proposed finance will have no such environmental impact. The use of duel fuel based power plant will cause air pollution to some extent. Also, a sugar refinery can be blamed for sound pollution in the factory premises. Financial Data & Key Indicators: If we look at the financial data and key indicators of YSIL, we will see that it has quite a stable growth. All the numbers are given in Thousand Taka. From 6,304,789 in 2008, the Gross Sales/Revenue of YSIL moved to 11,609,638 in 2009 resulting in a change of 84.14%. The Gross Sales in 2010 was 15,106,897 with an increase of 30.12%. The gross profit of YSIL was 677,258 in 2008 and 1,146,465 in 2009. In 2010, the gross profit increased by 34.37% and rose to 1,540,554 The net profit also increased 53.10% in 2010 and became 767,189. In 2008 and 2009, it was 237,643 and 501,113 respectively. The Gross Fixed Assets of the company in 2010 was 3,103,046 compared to 1,701,221 in 2008 and 2,123,046 in 2009. The increase in 2010 was 46.16% Total Current Assets of the company in 2010 was 3,935,027 compared to 4,134,966 in 2009 and 2,037,365 in 2008. The change in 2010 was -4.84% The Total Assets of YSIL was 3,422,446 in 2008 and 5,765,959 in 2009. In 2010, the Total Assets increased by 9.08% and rose to 6,289,541. The Net worth of YSIL changed from 841,404 in 2008 to 1,342,517 in 2009. In 2010, the company saw a stable growth of 57.15% in Net Worth and reached 2,109,707. The company had 2,279 in total Current Liabilities in 2008. In 2009, it was 3,896 and in 2010, it was 4,297.


The total long term debt of the company in 2008 was 2,578,763, in 2009 it was 4,419,546 and in 2010, it was 4,175,537. Considering these factors, it can be said that CSIL is enjoying a very good growth in recent years in the industry by being the largest player.

Risk Assessment: The facility gets a 2 in the grading scale of ULC which denotes it as an acceptable facility. It is a standard facility. And the coverage from the Asset/Collateral/Cash Security is Above Average. In case of Default, the Security loss will be Tk. -23,332,083 in this finance and a cumulative surplus of Tk 23,332,083. In the borrower grading scale, the size of the borrower is determined as a Large Manufacturing borrower. The grade given is 2 which is a better borrower. The borrower is deemed as strong borrower with fair liquidity and low leverage. The company demonstrates consistent earnings and cash flow certainty. The borrower has strong market share and management skill. All security documentations are in place. The combined risk grade given is 2 which denote a better borrower backed by acceptable facility coverage.

Justification for recommendation: The facility was recommended for approval based on the track record of the company. The company has adequate demand of products in the market. It has regular cash flow in the business and a very strong group support. The future business prospect with the group is also very good. Analysis of the Financing Proposals: Financing Proposal of X Furnisher Ltd.: The client XFL meets all the requirements set by ULC for a facility. The company has been running for more than 34 years now. It is located in the capital, Dhaka, thus, it is located in a place with good infrastructure and communication facilities which is a requirement of ULC. It is a manufacturing business. So, loan/lease can be approved according to ULC guidelines.


Since, it is a private limited company, ULC requires its Managing Director to have more than 3 years of experience in the same field. In case of XFL, we can see that its MD has experience of more than 34 years. He also qualifies as an acceptable borrower according to the ULC guidelines. He has enough experience and control of the company required by ULC. The total finance amount asked by XFL was Tk. 25,000,000 as a term loan which is acceptable because UCL can give up to 75% of the project finance amount. In case of a term loan facility, the maximum Loan period offered by ULC is 60 months. In the case of XFL, it is 48 months which is within the ULC rules. ULC offers the borrower to pay with post-dated cheque, monthly cheque, standing instruction or even cash which is an exception depending on the nature of business. XFL will pay with post-dated cheques. The loan to XFL is fully secured. With the mortgaged property worth Tk 23,850,000, there are personal guarantee of all the directors of the concern. XFL has a clean CIB report which is of standard as on 13.03.2011. It meets the requirement of ULC of the CIB report being not more than 3 months old. XFL has 3 major creditors. And it had a balanced record with all the creditors. The repayment status of XFL also shows that it has a clean record and has maintained a regular repayment track with ULC. Considering the business and market of XFL, we can see that, it is one of the biggest players in the furniture industry. It has in its client lists, the top end of the society. The yearly revenue and Net profit of the company is a very healthy one and can be taken as an indicator how XFL has been performing in the recent years. The impact of ULC financing the project will not create any employment opportunities, but it will result in XFL being able to increase its productivity. This increase of production will result in an increase in the revenue and profitability of the concern in the unsaturated market of furniture, where the demand is still growing. And considering the target segment of XFL, this increase in production will definitely increase the revenue of the company up to a great extent. If we look at the Financial Data of XFL, we will see that even in this time of Economic crunch, the company has enjoyed a steady growth in its sales. The gross sales increased 35.49% in 2010 to that of 2009. And this holds true for Gross Profit and Net Profit as well. It


can be safely said that XFL is doing very well in the market, and they have a very good growth rate too. All of these are indicators that the business is safe. However, a concern for the company might be the fact is that it had a big rise in the total long term debt for the operations. The ratios for the company also speak for itself. It has a gross profit margin of 47% and a PAT Margin of 13% in 2010. The receivable turnover of 3 days shows that the company does not face problems collecting money. A quick ratio of 0.31 implies that the company has enough liquidity, so has a good coverage. The profitability of the other affiliated concerns show that XFL has group strength and can be relied upon. The two joint ventures of XFL show that the company has a very bright future prospect in the industry. So, financing in this company is not a bad option XFL was given a Facility Grade of 3 which denoted an average facility. It is because the facility is a standard one. And the Coverage from Asset/Collateral/Cash is Average. Being a medium manufacturing borrower, XFL received a Borrower risk grade of 3. The borrower was not as strong as a good grade borrower but was not that bad either. They demonstrated consistent earnings in the last three years. They have enough liquidity, cash flow and earnings. In this grade, credits are normally secured by acceptable collateral. Considering that XFL received 3 in both Facility Risk Grade and Borrower Risk grade, the Combined Risk Grade given to XFL was 4. It denoted an Acceptable Borrower with average standard of security average. Financing Proposal of Y Sugar Industries Limited: Y Sugar Industries Limited is a concern of the Y Group. YSIL applied for a Lease to buy capital machinery for its refinery. If we look at the business, we can see that it is an acceptable business according to the rules of ULC. The location of the business, the tenure, the legal status of the business all is compliant to the ULC rules. According to the guideline of ULC for Lease, a firm can be given up to 100% of the market price of its assets provided that it is an existing client. Moreover, in case of buying machinery, ULC requires that the machinery should have an economic life more than the


finance period. The machinery should also have a reasonable resale value and can note be perishable. The proposed machine of YSIL meets all the requirements set by ULC for leasing. ULC offers the borrower to pay with post-dated cheque, monthly cheque, standing instruction or even cash which is an exception depending on the nature of business. Y will pay with monthly cheques. The lease is secured by the personal guarantee of Mr F. Considering the reputation of Mr F his group, financing here is a safe option. YSIL has a clean CIB report which is of standard as on 08.03.2011. It meets the requirement of ULC of the CIB report being not more than 3 months old. YSIL has 17 creditors. The company currently has no exposure to ULC, but maintained regular payment behaviour in its previous contracts with ULC. If we look at the numbers of YSIL in terms of business and market, we will see that, it is the single largest refined sugar manufacturer of the country. It has a market all over Bangladesh. Whereas, the total country demand of refined sugar is 1.4 million metric ton, YSIL itself produces 45% of it. Its market dominance is again proved when we look at its Yearly Revenue and Yearly Net Profit which are Tk 15,106.90 million and Tk 767.19 million respectively. Financing the project will not generate any further employment. Rather, it will help the company utilize its capacity more. It will make YSIL’s capacity to refine sugar increase from 2,000 MT per day to 5,000 MT per day. If we look at the Financial Data of YSIL, we will see that the company has enjoyed a steady growth in its sales. The gross sales increased 30.12% in 2010 to that of 2009. And this holds true for Gross Profit and Net Profit as well. It can be easily said that YSIL is dominating the market, and they have a very good growth rate too. All of these are indicators that the business is safe to finance. The current ratio of 14.23 of YSIL shows that the company is very liquid. The gross profit margin is 10% which is a stable one. The PAT margin is also a stable one. The receivable turnover is only 1 day which shows that the company has cash flow certainty. The company was given a facility risk grade of 2 which denotes Acceptable Facility. The Coverage from Asset/Collateral/Cash Security of the company is above average.


The borrower is a Large Manufacturer. And the borrower is given a Borrower Risk Grade of 2 denoting a better quality borrower. The strong repayment capacity of the borrower with fair liquidity and low leverage facilitated this grading. The company has strong earnings and cash flow certainty. The borrower is also an experienced manager and has a strong market share. The company got a Combined Risk Grade of 2 which represents a Better Quality Borrower backed by acceptable facility coverage. The financing proposal of YSIL was justly approved because of the adequate demand of its product in the market. The market is still unsaturated, because imports are still taking place. So, a rise in the production of the major player of the industry will definitely result in more sales. The type of the goods ensures that there is a regular cash flow in the business. YSIL is a part of a big conglomerate of Bangladesh. So, it has a very strong group support. Moreover, the business of Y Group is still expanding. So, approving this proposal will brighten the future business aspect with the group. It was thus properly evaluated to approve the financing proposal.

Recommendations ULC takes a qualitative approach while evaluating the companies for financing. This approach, if can be made a quantitative one will be more useful to evaluate an organization. The Credit Risk Grading policies of ULC, though currently are in compliance with the central bank’s guidelines, continuous monitoring is required to look into the future. The industry best practices of not only Bangladesh but also outside the national boundaries are needed to be looked at for ULC to remain competitive in the market. During this time of global economic crunch, numbers can be a very good indicator of a company’s performance. This aspect should be brought into consideration. More attention to the quantitative factors of Credit Risk Grading can be the best indicators in the status quo.


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Policy of United Leasing Company